2019 Director Compensation

The following table summarizes the principal components of compensation paid or granted to individuals for their service as non-employee directors of PG&E Corporation and the Utility during 2019.

Non-Employee Director Total 2019 Compensation Summary

Retainers and Fees

Retainers and fees were paid as described in the above summary table. Any director who serves on the PG&E Corporation Board, Audit Committee, Executive Committee, or Safety and Nuclear Oversight Committee does not receive additional retainers for concurrent service on the Utility Board, Audit Committee, Executive Committee, or Safety and Nuclear Oversight Committee, as applicable.

Non-Employee Director Stock-Based Compensation

Under the 2014 LTIP, each non-employee director of PG&E Corporation is entitled to receive annual awards of stock-based compensation. Pursuant to the terms of the 2014 LTIP, as approved by PG&E Corporation’s shareholders, the annual value of equity awards provided to any one non-employee director is limited to $400,000 in any calendar year. Such annual awards historically have been comprised of RSUs with a total aggregate value of $140,000, except that the value of the RSUs historically awarded to the PG&E Corporation Chair of the Board is $220,000. Such awards are granted following a non-employee director’s election to the Board of Directors of PG&E Corporation at the annual shareholder meeting, are vested at the earlier of the end of the recipient director’s annual elected term or one year after the date of grants, and are settled in shares of PG&E Corporation common stock.

After the filing of the Chapter 11 Cases, LTIP awards to non-employee directors were suspended. Following consultation with the Compensation Committee’s consultants, the Compensation Committee recommended, and the PG&E Corporation Board approved, equity-based awards for 2019 to replace the standard annual RSU award provided by the LTIP. The Bankruptcy Court approved the granting of such awards on October 19, 2019 and the awards were granted effective November 13, 2019, consistent with the Equity Grant Date Policy (as defined below). These replacement stock awards have the same total aggregate value as the standard annual non-employee director RSUs provided for under the LTIP, with the exception of grants awarded to Messrs. Smith and Woolard, who joined the Board after the June 2019 annual meeting and thus each received a pro-rated aggregate value of $105,000. These 2019 replacement stock awards vest on the later of June 22, 2020 and the date of PG&E Corporation’s emergence from Chapter 11. The aggregate value of the stock awards will be converted into units with a value equal to a share of PG&E Corporation common stock upon PG&E Corporation’s emergence from Chapter 11 and settled in shares of post-emergence PG&E Corporation common stock. If a non-employee director separates from service prior to the normal vesting date, the replacement stock award will be forfeited except in the event of (i) the recipient’s death or Disability (within the meaning of Section 409A of the Internal Revenue Code), (ii) the recipient’s resignation in connection with or in anticipation of the confirmation of PG&E Corporation’s Chapter 11 plan of reorganization, (iii) PG&E Corporation’s Nominating and Governance Committee’s approval of vesting in connection with the recipient’s resignation or removal, or (iv) the recipient’s ceasing to be on the Board following a Change in Control (as defined in the 2014 LTIP) for any reason; provided, however, that if the recipient has a Separation from Service (as defined in the 2014 LTIP) due to a pending Disability determination, forfeiture will not occur until a finding that such Disability has not occurred.

Stock Ownership Guidelines

Non-employee directors of PG&E Corporation are expected to own shares of PG&E Corporation common stock having a dollar value of at least five times the value of the then-applicable annual Board retainer. If any non-employee director is on the Utility Board only, then that director also may satisfy his or her stock ownership obligation with Utility preferred stock. Directors generally have five years to meet the guidelines. Ownership includes beneficial ownership of common stock, as well as RSUs and common stock equivalents. These guidelines were adopted to more closely align the interests of directors and each company’s shareholders.

Deferral of Retainers and Fees

Under the PG&E Corporation 2005 Deferred Compensation Plan for Non-Employee Directors, directors of PG&E Corporation and the Utility may elect to defer all of their retainers, all of their meeting fees (if any), or both. Directors who participate in the Deferred Compensation Plan may elect either to (1) convert their deferred compensation into common stock equivalents, the value of which is tied to the market value of PG&E Corporation common stock, or (2) have their deferred compensation deemed to be invested in the AA Utility Bond Fund (which is described in the narrative following the “Non-Qualified Deferred Compensation—2019”). All participating directors have elected to convert their deferred compensation into common stock equivalents, which are reflected in the “Security Ownership of Management” table in the “Common Stock Equivalent” column.

Reimbursement for Travel and Other Expenses

Directors of PG&E Corporation and the Utility are reimbursed for reasonable expenses incurred in connection with attending Board, Board committee, or shareholder meetings, or participating in other activities undertaken on behalf of the Corporation or the Utility.

Retirement Benefits from PG&E Corporation or the Utility

The non-employee directors of the Boards of PG&E Corporation and the Utility are not provided retirement benefits.

III.  Compensation Committee Report

The Compensation Committee of PG&E Corporation is comprised of independent directors and operates under a written charter adopted by the PG&E Corporation Board. The Compensation Committee is responsible for overseeing and establishing officer compensation policies for PG&E Corporation, the Utility, and their subsidiaries.

The Compensation Committee has reviewed and discussed the section entitled “Compensation Discussion and Analysis” with management. Based on its review, discussion with management and advice from Pay Governance, independent advisor to the Committee, the Compensation Committee has recommended to the Boards of PG&E Corporation and the Utility that the “Compensation Discussion and Analysis” section be included in this Part III.

March 24, 2020

Meridee A. Moore, Chair
William L. Smith
Alejandro D. Wolff

The three names listed above reflect the composition of the Compensation Committee as of March 24, 2020, the date of this Compensation Committee report.

IV.  Compensation Discussion and Analysis

This CD&A describes the companies’ compensation philosophy, executive compensation program, how the NEOs were compensated in 2019 and how that compensation may change in 2020. The CD&A discusses:

Detailed information regarding 2019 NEO compensation can be found in the Executive Officer Compensation Information section following this CD&A.

1.  PERFORMANCE AND PAY HIGHLIGHTS

Corporate Performance Overview

2019 was a turbulent and eventful year in the history of the companies. It began with PG&E Corporation and the Utility’s (together, “PG&E”) January 29, 2019 filing of a voluntary petition for relief under Chapter 11 to address, among other things, liabilities associated with devastating wildfires in recent years.  The year ended with the companies reaching settlements with three key creditor constituencies holding wildfire-related claims, an election to participate in the Wildfire Fund, the filing of a Proposed Plan (which was later amended) and the securing of key financing commitments.

In April 2019, the Boards of both PG&E Corporation and the Utility were substantially refreshed, with 11 new directors joining two continuing directors, and eight incumbent directors stepping down.  Two of the new directors subsequently resigned, and two new additional directors joined the Boards later in 2019.  Each Board also appointed a new Chief Executive Officer and President—William D. Johnson for PG&E Corporation, and Andrew M. Vesey for the Utility.

At the operational level, the Utility enhanced and continued to deliver on the goals in its Community Wildfire Safety Program. The Utility completed extensive work to further strengthen electric infrastructure, increase safety, and reduce wildfire risk—while also taking the extraordinary measure to shut off power during extreme weather events to mitigate wildfire risk pursuant to the Utility’s Public Safety Power Shutoff (“PSPS”) program that was approved by the California Public Utilities Commission (“CPUC”).

This operating environment produced unprecedented financial challenges, with significant consequences for executive compensation. We reported GAAP losses for 2019 driven primarily by pre-tax charges of $11.9 billion for costs related to the 2015 Butte fire, 2017 Northern California wildfires and the 2018 Camp fire, net of insurance, as well as $773 million of electric asset inspection and repair costs and $199 million of costs related to PG&E Corporation and the Utility’s reorganization cases under Chapter 11. PG&E Corporation’s stock price fluctuated widely in response to these and other factors but remained sharply below previous values, resulting in negative shareholder returns on a one-, three-, and five-year basis.

As a result of this underperformance, performance-based compensation awards that were tied to 2017-2019 relative total shareholder return (“TSR”) resulted in no payout; outstanding stock options remain currently entirely underwater, and unvested 2018 restricted stock unit (“RSU”) grants are worth approximately 26 percent of grant date market value as of December 31, 2019.

Once the new Compensation Committee (“Committee”) of the PG&E Corporation Board was appointed in April 2019, it undertook a review of the 2019 short-term performance measures and metrics that had recently been approved by the U.S. Bankruptcy Court (the “Bankruptcy Court”) for the broad employee population.  Most NEOs were ineligible to participate in the approved 2019 Short-Term Incentive Plan (“STIP”).

In order to prioritize wildfire safety for senior executives, the Compensation Committee imposed a Public Safety Index (“PSI”) Modifier which would adjust the executives’ performance score downwards, and thus reduce payouts, for certain senior executives who are “insiders” under the Bankruptcy Code (the “Chapter 11 Insiders”), including the two newly elected CEOs, if certain wildfire safety metrics were not achieved. The Companies filed motions to approve short- and long-term compensation arrangements for senior executives (including the NEOs), the Key Employee Incentive Program (“KEIP”), and motions to approve short- and long-term compensation for both CEOs. Both plans included the PSI Modifier.  The Bankruptcy Court approved the 2019 compensation arrangements for the two CEOs but declined to approve the KEIP.  As a result, certain of our executives’ realized pay for 2019 was limited to base salary, with no performance based compensation, and thus was significantly below that of their utility industry peers.

We remain committed to providing safe, reliable, affordable and clean electric and gas services. The safety of our communities, our customers, and our employees are of utmost importance to us. We believe that the initiatives we took in 2019 will position PG&E Corporation and the Utility to continue to improve safety and operational effectiveness in 2020 as we work to become the kind of enterprise our customers expect and deserve.

In 2020, in response to the legislative mandates of Assembly Bill (“AB”) 1054 and suggestions from the CPUC, the Committee led a significant redesign of the companies’ compensation programs.  The 2020 short- and long-term incentive plans prioritize customer welfare and public safety, while also emphasizing financial stability.  By and large, they are outcome- not activity-based, and results are objective and verifiable. The Committee and the companies believe these new programs, which are currently awaiting approval from the Bankruptcy Court, not only comply with AB 1054, but will lead the industry by focusing on risk mitigation and incentivizing the companies’ specific public safety and customer welfare objectives.

Short-Term Performance and Pay

The STIP is the annual cash incentive plan for certain employees of PG&E Corporation and the Utility. Performance is measured against targets previously approved by the prior Compensation Committee.

2018 STIP Awards

For 2018 STIP awards, which would otherwise have been payable in 2019, management recommended that the prior Compensation Committee exercise its discretion and reduce the overall performance score to zero, based on a review of overall performance in light of the devastating 2018 Camp fire, the hardships incurred by various communities and others, and the companies’ financial circumstances including the need to seek relief under Chapter 11. The prior Compensation Committee and Boards accepted the recommendation and no 2018 STIP awards were paid.

2019 STIP Awards and CEO Incentives

On August 30, 2019, the Bankruptcy Court declined to approve a motion which would have allowed Chapter 11 Insiders to participate in the proposed KEIP approved by the Committee. However, Messrs. Welsch and Christopher were STIP participants prior to their becoming executive officers (and Chapter 11 Insiders) and therefore received quarterly STIP payments in 2019. Upon becoming Chapter 11 Insiders, Messrs. Welsch, effective April 13, 2019 and Christopher, effective October 1, 2019, were ineligible for further STIP payments.  Mr. Christopher is no longer with the Utility.

 

Under compensation arrangements that were approved by the Bankruptcy Court, the CEOs’ 2019 performance shares were qualified by the same performance measures and targets as the 2019 broad employee STIP, with two exceptions: they were measured (and earned) annually, not quarterly, and were subject to the PSI Modifier, which was imposed by the Committee to ensure payouts would be reduced if important Electric Operations wildfire targets were not met.  For details regarding the PSI Modifier, please see the discussion under “Annual Equity Incentives Granted in 2019.”

The final overall performance score for the 2019 STIP was 1.184.

The score for Mr. Johnson’s 2019 annual equity incentive was based on STIP performance results from April 1, 2019 through December 31, 2019, resulting in a final performance score of 1.021. As stated above, since the PSI Modifier was above target, the performance score was not reduced by the PSI Modifier.

The score for Mr. Vesey’s 2019 annual equity incentive was based on STIP performance results from July 1, 2019 through December 31, 2019, resulting in a final performance score of 1.069. As stated above, because the PSI Modifier was above target, the performance score was not reduced by the PSI Modifier.

Long-Term Performance and Pay – 2017 Performance Results

Our equity-based incentive plan, the Long-Term Incentive Plan (“LTIP”), is designed to link executive performance to long-term shareholder returns, safety and financial performance. Awards historically consisted of (1) performance shares which cliff-vest following a three-year performance period, (2) RSUs with time-based vesting, and (3) stock options with time-based vesting (granted in 2018 only).

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¹ “Adjusted Non-GAAP Earnings from Operations,” a non-GAAP financial measure, represents Non-GAAP Earnings from Operations as further adjusted to ensure performance is measured in a manner consistent with the methodology used to establish the applicable STIP target. The methodology adjusts for drivers that are subject to volatility associated with the Chapter 11 Cases by removing any favorable or unfavorable budget variances related to operating interest, Allowance for Funds Used During Construction (AFUDC), capital structure, or other large favorable or unfavorable variances (defined as $10 million or more per quarter after tax) arising from the Chapter 11 proceedings, using their effective tax rate. “Non-GAAP Earnings from Operations” is a non-GAAP financial measure and is calculated as income available for (loss attributable to) common shareholders less items impacting comparability. See Exhibit A for the definition of “items impacting comparability” and a reconciliation of consolidated income available for (loss attributable to) common shareholders to Adjusted Non-GAAP Earnings From Operations.

Performance share awards granted in 2017 vested on February 21, 2020. Results for 2017 performance shares are described below. No LTIP awards were made in 2019, other than the equity incentives for the PG&E Corporation and Utility CEOs described below.

2017 Performance Share Result – Total Shareholder Return (“TSR”)

Fifty percent of LTIP awards granted in 2017 were allocated to performance shares with the payout determined by comparing PG&E Corporation’s TSR to that of the companies in its 2017 Performance Comparator Group (“relative TSR”). PG&E Corporation’s TSR ranked below all companies in the 2017 Performance Comparator Group for the three-year period from 2017 to 2019, resulting in no payout in 2020 with respect to these performance shares.

2017 Performance Share Result – Safety and Financial

Ten percent of LTIP awards granted in 2017 were allocated to performance shares with the payout determined by measuring performance against equally-weighted safety and financial goals. Safety performance, as measured by 2017 through 2019 performance in the Serious Injuries and Fatalities Effectiveness of Corrective Actions measure, was above the maximum level. Financial performance, as measured by three-year Average Non-GAAP Earnings From Operations per Share² measure, was slightly above target. After weighting each measure’s results by one-half, the overall result was a 152 percent payout in 2020 for these performance shares, which represented 10 percent of the total target LTIP grant value for 2017.

2.  COMPENSATION PROGRAM OBJECTIVES, PROCESS, AND COMPETITIVE MARKET REVIEW

2019 Officer Compensation Program Objectives

For 2019, the prior Compensation Committee established three primary objectives for PG&E Corporation’s officer compensation program:

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² Non-GAAP Earnings From Operations per Share is a non-GAAP financial measure, representing Non-GAAP Earnings From Operations divided by common shares outstanding (diluted).  For 2017 and 2018, Non-GAAP Earnings From Operations for STIP purposes did not reflect any adjustments related to the Chapter 11 Cases, which are reflected in the measure “Adjusted Non-GAAP Earnings From Operations” for 2019.

 

PG&E Corporation’s and the Utility’s compensation policies and practices described below and elsewhere in this CD&A were generally designed to meet these objectives.

In 2019, the compensation structure for the new PG&E Corporation CEO and Utility CEO also was designed to attract the senior leadership talent required to navigate uncertainty around the Chapter 11 Cases, and thus differed from that for other executive officers.

As a result of the denial of the KEIP motion by the Bankruptcy Court, most executive officers received only base salary in 2019, which is not aligned with the three objectives described above. However, the CEOs’ compensation structure is strongly aligned with those objectives.

The Committee also considers shareholder advisory votes as part of its review of executive compensation programs and practices. In June 2019, PG&E Corporation’s and the Utility’s shareholders approved the companies’ NEO compensation for 2018 with votes of 93.6 percent and 99.9 percent, respectively.  In light of the change in the companies’ circumstances between 2018 and 2019, those voting results did not significantly impact the Committee’s decisions relating to 2019 executive compensation.

Executive Officer Compensation-Setting Process

Under normal circumstances, the independent members of the applicable Board, based on the Committee’s advice and recommendation, would approve the amounts of total target compensation for the CEO of PG&E Corporation and the CEO of the Utility. Such approvals were made following a review of comparative data, advice from the Committee’s independent compensation consultants, and an assessment of individual performance, objectives and scope of responsibilities. In 2019, the same approach was used to developing new compensation arrangements for the incoming PG&E Corporation and Utility CEOs, subject to the need to obtain Bankruptcy Court approval of those arrangements.

The Committee also approves the amounts of total target compensation for all other executive officers based upon a review of comparative data, advice from its independent compensation consultants, and recommendations from the PG&E Corporation CEO and the Utility CEO, as applicable. The Committee uses comparative data throughout the year to set the total target compensation of new executive officers. The Committee also reviews other benefits provided to executive officers.

The PG&E Corporation Board has delegated to the Committee the authority to administer the 2014 LTIP, under which equity-based awards have been made. In 2019, the only such awards made were to the new CEOs of PG&E Corporation and the Utility. In addition, the PG&E Corporation Board has delegated to the PG&E Corporation CEO the authority to grant LTIP awards to certain eligible participants within the guidelines adopted by the Committee. In 2019, no such awards were granted.

The PG&E Corporation CEO and the Utility CEO generally attend a portion of Committee meetings but excuse themselves from the Committee’s deliberations or decisions with respect to their own pay. At the Committee’s request, the PG&E Corporation CEO and the Utility CEO review with the Committee the performance of the other NEOs. The PG&E Corporation CEO and the Utility CEO, as applicable, also recommend adjustments, if any, in base pay, annual incentive awards, and LTIP awards for the other NEOs.

These recommendations are given appropriate weight by the Committee in the compensation-setting process, given the CEOs’ direct knowledge of the performance and contributions of each NEO. The Committee may exercise its discretion to accept, reject, or modify their recommendations based on the Committee members’ collective assessment of the NEOs’ performance and pay position relative to the peer group, as well as PG&E Corporation’s overall financial and operating performance and other factors that the Committee deems appropriate.

The Committee may delegate its authority with respect to ministerial matters under the 2014 LTIP to the PG&E Corporation CEO or either company’s Senior Vice President, Human Resources.

The PG&E Corporation Board has delegated to the PG&E Corporation CEO the authority to approve compensation, within guidelines approved by the Committee, to lower-level officers—excluding Section 16 Officers—and to non-officer employees. With respect to equity awards, such Committee-approved guidelines include the LTIP annual award value ranges for different categories of employees, an aggregate cap on the value of awards for any given year, and the terms and conditions of all LTIP awards to be made during the year. The guidelines also specify the grant date for annual LTIP awards. Actual awards are made within the range of target LTIP values previously approved by the Committee. In 2019, no such equity awards were approved by the PG&E Corporation CEO.

 

In 2019, all compensation decisions for non-CEO NEOs were made by the Committee as constituted prior to the April 2019 board refreshment. Due to the Chapter 11 Cases and the companies’ related financial situation, no executive officers received base salary increases during annual pay planning. Additionally, those executive officers who were Chapter 11 Insiders did not receive annual short-term cash incentives, and no long-term incentives were awarded except to the CEOs as part of separate compensation packages approved by the Bankruptcy Court. As a result, in 2019, most executive officers received only base salary.

Consultants and Advisers

The Committee retains independent compensation consultants to advise the Committee on compensation programs and practices, including pay levels for non-employee directors and for officers.

For establishing 2019 compensation, the Committee retained Pay Governance LLC as its independent consultant for general compensation issues. Pay Governance did not provide any services to management of PG&E Corporation, the Utility, or their affiliates, although Pay Governance has maintained a working relationship with management in order to fulfill Pay Governance’s primary role as adviser to the Committee. Pay Governance is a nationally recognized independent firm providing consulting assistance to corporations to develop compensation programs for senior executives, key employees, and boards of directors. Pay Governance was first selected as the Committee’s independent consultant in September 2014, following the Committee’s review of numerous candidate firms.

During 2019, Pay Governance advised the Committee on the following matters:

In addition, for 2019, the companies consulted with Willis Towers Watson (“WTW”) for the discrete, targeted purpose of obtaining guidance to advise the Committee, the Boards of Directors, and management with respect to incentive plans, retention plans, and non-employee director compensation for companies undergoing financial restructurings. WTW received $318,000 in fees during 2019 for such services. WTW also has historically provided the companies with customary actuarial and consulting services with respect to employee compensation and benefit plan administration. WTW received $2.348 million for such services during 2019. The WTW representatives who work on the targeted executive and director compensation issues for the companies have no relationships with PG&E Corporation’s and the Utility’s Board members and executive management (other than through the provisions of such targeted consulting services) and are independent of the WTW team working on ordinary course matters for the companies. Compensation that would be received by the WTW executive and director compensation team is not directly tied to the other fees paid to WTW by PG&E Corporation and the Utility.

The Committee determined that no conflicts of interest were raised by the work of Pay Governance or WTW during 2019.

The Committee also has discretion to engage other compensation consultants, as well as legal counsel and other advisers. The Committee will consider any advisers’ and consultants’ independence, and whether the work of any compensation consultants will raise any conflict of interest. PG&E Corporation pays the reasonable compensation costs for any such advisers and consultants.

Management also may retain compensation consultants to assist management and the Committee in connection with compensation matters.

 

2019 NEO Compensation Competitive Market Review

For 2019, the Committee approved and used a Pay Comparator Group of publicly traded gas and electric utilities to evaluate market practice and assess PG&E Corporation’s and the Utility’s competitive pay position, supplemented by data for the broader energy services sector or general industry, as appropriate. All elements of NEO total direct pay (base pay and short- and long-term incentive targets) were compared individually and in aggregate to the applicable benchmark data, although most executive officers did not receive short- or long-term incentives in 2019.

The Committee does not adhere strictly to formulas or survey data to determine the actual mix and amounts of compensation. The Committee considers various additional factors, including each NEO’s scope of responsibility and organizational impact, experience, and performance, as well as PG&E Corporation’s and the Utility’s overall safety, operating, and financial results. This flexibility is important in supporting the overall pay-for-performance philosophy and in meeting the Committee’s objectives of attracting, retaining, and motivating a talented executive leadership team.

In setting 2019 compensation levels, base pay and incentive targets were aligned with the market median; however, since the KEIP motion was denied by the Bankruptcy Court, actual compensation for executive officers was substantially below market.

Pay Comparator Group

For 2019, the Pay Comparator Group used to benchmark compensation elements consisted of all companies listed in the Philadelphia Utility Index, with three deletions and two replacements—consistent with the Pay Comparator Group used in 2018. Sempra Energy and WEC Energy Group, Inc. were used as comparators in place of American Water Works, due to its dissimilar business model, and El Paso Electric, due to its size (annual revenues less than  $1 billion), respectively. During 2019, the Philadelphia Utility Index added Pinnacle West Capital Corporation, but it was eliminated from the pay comparator group because, like El Paso Electric, the company’s annual revenue is too small to make it a reasonable pay comparator. The Philadelphia Utility Index, which is administered by NASDAQ, consists of a group of 20 companies that are selected by NASDAQ based on having a primary business in the electric utility sector and meeting minimum market capitalization criteria.

A total of 19 companies were included in the 2019 Pay Comparator Group.

 

In addition, supplemental data for the broader energy services segment, adjusted for PG&E Corporation’s revenues, was provided by WTW from its proprietary Energy Services executive compensation survey, which includes information from over 100 energy services companies, and the broader WTW general industry compensation databank supplemented benchmark data for select positions. Due to the proprietary nature of the data, WTW did not disclose the companies matching individual benchmark positions.

Executive Stock Ownership Guidelines

The 2010 Executive Stock Ownership Guidelines are designed to encourage senior executive officers to achieve and maintain a minimum investment in PG&E Corporation common stock at levels set by the Committee, and to further align executive interests with those of PG&E Corporation’s shareholders. We believe that executive stock ownership guidelines are viewed by stakeholders as an important element of a company’s governance policies.

For NEOs in 2019, the stock ownership target for Mr. Johnson was six times base salary, the target for Messrs. Vesey, Wells, and Simon and Ms. Loduca was three times base salary, and the target for Messrs. Lewis and Welsch was one and one-half times base salary. Mr. Thomason is not subject to stock ownership guidelines. Prior to their respective departures, the stock ownership target for Ms. Williams was six times base salary, the target for Mr. Malnight was three times base salary, and the target for Messrs. Soto, Christopher, and Hogan was one and one-half times base salary.

Until an executive meets the applicable stock ownership guideline, he or she must retain 50 percent of the net shares realized from the vesting of RSUs or stock units (including performance shares), after accounting for tax withholding. For calculating compliance with the guidelines, unvested RSUs and unvested stock units are not considered, except that after a participant is retirement-eligible (as defined in the applicable award agreement), unvested RSUs are considered for purposes of satisfying the ownership guidelines.

 

During 2019, due to the low price of PG&E Corporation stock, no executive officers met their retention requirements and all executive officers were subject to the 50 percent retention restriction. The guidelines have not been amended or suspended during the pendency of the Chapter 11 Cases, and conformance with guidelines will continue to be monitored in the future.

Hedging Policy

The companies’ Insider Trading Policy (“Policy”) limits certain hedging activities conducted by the companies’ (a) board members, (b) officers, and (c) designated employees who are subject to a quarterly earnings blackout period or an event-specific blackout period.

Specifically, the Insiders, as defined in the Policy, may not engage in:

Clawback Policy

In February 2018, and again in February 2019, the Committee approved changes to the Executive Incentive Compensation Recoupment Policy (“Clawback Policy”), broadening the scope of events to which recoupment applies, including events not predicated on a restatement. The policy now provides the Committee and Boards with the discretion to seek recoupment of payments, including short- and long-term cash and equity incentive payments, made to a Section 16 Officer under the following circumstances:

Compensation Risk Analysis

Pay Governance assists the Committee in its oversight of PG&E Corporation’s and the Utility’s  incentive plans relative to general compensation plan risk factors. Pay Governance reviewed the overall compensation pay structure, the overall mix of compensation vehicles, the structure of the incentive plans, other company pay plans, and governance for oversight of program design and administration. With respect to incentive plan structure, Pay Governance assisted the Committee to  specifically examine target and maximum compensation payable from each plan, the nature and mix of performance measures, the governance structure, the risk of earnings manipulation posed by the incentive structure, and the extent to which the NEO pay program rewards short-term decisions at the risk of long-term performance. The Committee also generally considered other compensation policies (such as clawback and anti-hedging policies and vesting provisions), other compensation plans relating to severance and change-in-control benefits, and compensation governance, and Pay Governance provided guidance to the Committee on such matters

For 2019, Pay Governance concluded that there were no material issues regarding the companies’ executive pay programs, and that the design of the companies’ incentive pay plans has, overall, a low-risk profile from the perspective of encouraging employees to take material risks that have potentially adverse consequences to the organization. The Pay Governance conclusion extends to the PG&E Corporation and Utility CEOs and for the NEOs who participated in the STIP during part of 2019.

 

To further ensure appropriate incentive metrics, the Committee also receives advice from the Safety and Nuclear Oversight Committees regarding appropriate safety and operational incentive measures. Pay Governance found that the emphasis on and overlap/consistency in safety metrics and weightings supports an organization-wide focus on safety in its 2019 compensation plans, which was further enhanced in the 2020 executive compensation redesign that is awaiting approval by the Bankruptcy Court.  Based on the foregoing, the companies concluded that the risks arising from the companies’ overall compensation policies and practices are not reasonably likely to have a material adverse effect on either PG&E Corporation or the Utility.

Tax Deductibility

With the passage of the Tax Cuts and Jobs Act of 2017, section 162(m) of the Internal Revenue Code of 1986, as amended, (the “Internal Revenue Code”), no longer permits companies to deduct certain qualified performance-based executive compensation. As a result, in establishing compensation for 2019, the Committee did not consider the tax deductibility limitations imposed by section 162(m).  Despite the limit on deductibility of performance-based compensation, the Committee continues to believe that a significant portion of NEO compensation should be tied to corporate performance.

Named Executive Officers

Named Executive Officers of PG&E Corporation for 2019 (positions as of December 31, 2019)

Named Executive Officers of Pacific Gas and Electric Company for 2019 (positions as of December 31, 2019)

Messrs. Johnson, Vesey, Simon, and Soto and Ms. Loduca are considered NEOs of the Utility. The other NEOs of the Utility for 2019 are:

During 2019, John Simon served as Interim CEO of PG&E Corporation and is a NEO of PG&E Corporation on that basis.  During 2019, prior to Andrew Vesey’s arrival at the Utility, the duties of the office of PEO were fulfilled by three officers.  As such, each of the following also is considered a former PEO of the Utility: Messrs. Christopher, Lewis, Malnight, Soto, and Welsch.

2019 Officer Compensation Program

The following types of compensation represent our general NEO compensation structure as delivered during 2019. Due to the 2019 CEO and President search at PG&E Corporation and the Utility and the need to obtain Bankruptcy Court approval for certain elements of compensation paid to Chapter 11 Insiders, the 2019 officer compensation program has three components, each of which may differ slightly from the general structure (as noted in the chart):

For 2019, the Committee and the independent members of the PG&E Corporation and Utility Boards of Directors, as applicable, also approved specific CEO compensation packages that offered equity-based short-term and long-term incentives. Such incentives are designed as part of an overall compensation program that is focused on performance, with an emphasis on safety and guiding the companies through the restructuring and transformation process. No other NEOs received equity-based grants for 2019. The Bankruptcy Court approved Mr. Johnson’s compensation arrangements on August 14, 2019, and approved Mr. Vesey’s compensation arrangements on October 19, 2019.

The following chart illustrates the percentage of target PG&E Corporation and Utility CEOs’ 2019 compensation allocated to base salary plus cash perquisite allowance, short-term incentives, and long-term incentives, as calculated with performance-based incentives at 100 percent target payout. The allocation of other NEOs’ compensation is not illustrated, given that the Bankruptcy Court declined to approve a motion which would have allowed Chapter 11 Insiders to participate in short-term cash incentive and long-term equity incentives under the proposed KEIP approved by the Committee.

³ Mr. Johnson’s target compensation excludes a one-time cash transition payment made in connection with his hire as CEO of PG&E Corporation and two thirds of the value of a one-time grant of performance-based options which vest over a 3-year period.

⁴ Mr. Vesey’s 2019 target compensation excludes a one-time cash transition payment in connection with his hire as Utility CEO.

Short-Term Incentives

The STIP is an at-risk component of pay. Under normal circumstances, NEOs and other eligible employees may earn annual performance-based cash incentive compensation under the STIP based on achievement of financial and operational goals approved by the Committee and an individual executive’s achievements for the year. Outside of Chapter 11, the Committee retains complete discretion to determine and pay all STIP awards to NEOs and other eligible employees. This includes discretion to reduce the final score on any and all measures downward to zero. Executives who are Chapter 11 Insiders are not allowed retentive compensation; however, the Committee still retains negative discretion to reduce or eliminate awards.

During 2019, as a result of the Chapter 11 Cases, no CEOs and no Chapter 11 Insiders were eligible to participate in cash payments under the STIP. Messrs. Welsch and Christopher were participants in the 2019 STIP prior to becoming executive officers and Chapter 11 Insiders and received STIP payments in 2019.

2019 STIP Structure and Results

For 2019, the prior Compensation Committee adopted a STIP structure for the broad employee base that continued PG&E Corporation’s and the Utility’s focus on improving public and workforce safety and customer satisfaction. The weights of the STIP components—Safety, Customer Satisfaction, and Financial—were 65 percent, ten percent, and 25 percent, respectively, representing an increased emphasis on safety compared to prior years and practices of our compensation peer group.

The Safety component was structured to provide a strong focus on the safety of employees, customers, and communities. It was made up of five measures: (1) Diablo Canyon Power Plant Safety and Reliability Index, (2) Public Safety Index, (3) Asset Records Duration Index, (4) First-Time In-Line Inspection Miles, and (5) Serious Injuries and Fatalities Corrective Actions Index.

The Customer Satisfaction measure—Escalated Customer Complaints—was designed to incent employees to be more responsive to customers’ needs.

Corporate financial performance was measured by PG&E Corporation’s Adjusted Non-GAAP Earnings From Operations compared to budget.

Each STIP measure has a threshold, target, and maximum level of performance used to arrive at a score ranging from zero to 1.5 (reduced from 2.0 in 2018) for that measure. Performance below the minimum performance level, or threshold, results in a zero score. Performance at the threshold results in a STIP score of 0.5. Target performance results in a STIP score of 1.0, and performance at or above the maximum established level results in a score of 1.5. A score of 1.0 provides 100 percent of an executive’s target payout. Performance at the threshold and maximum levels delivers 50 percent and 150 percent of targeted payout, respectively. Linear interpolation is used to determine scores for performance between threshold and target and target and maximum.

The STIP overall performance score is the sum of the weighted cumulative average scores for performance on each of the STIP measures.

Taking into account the uncertainties associated with the Chapter 11 Cases in 2019, STIP payments were reviewed and paid on a quarterly schedule, instead of in a single annual payment, although the STIP overall remains an annual incentive plan. Year-to-date threshold, target, and maximum performance targets were established at the beginning of the year for each quarter, and performance for the year-to-date was compared to the quarterly targets to establish a year-to-date overall performance score each quarter. Quarterly payments were made based on each employee’s earnings for the year to date and the year-to-date overall performance score, resulting in a trued-up payment each quarter. The final quarterly payments, made on March 13, 2020, represented a true-up to the final annual overall performance score. For NEOs who departed the companies, there were no clawbacks or true-downs for metric deterioration, if any, quarter over quarter.

A participating employee’s final STIP score also may be increased or decreased by an individual performance modifier, which can range from zero percent to 150 percent. In 2019, the modifier was applied to the final quarterly payment, representing the overall annual STIP true-up. The individual performance modifier did not affect the payments received for STIP by Messrs. Welsch or Christopher.

 

For 2019, the measures and related weightings, thresholds, targets, maximums, and results for calculating the year-end STIP performance score were as follows:

The measures in the foregoing table are defined below:

 

Individual Awards Determination

Prior to the Bankruptcy filing, STIP cash awards to NEOs are calculated as follows:

 

For 2019 STIP awards, the Committee approved NEO participation rates that ranged from 45 percent to 130 percent of base salary (the 130 percent participation rate applies only to the PG&E Corporation CEO). This range is within the 15 percent band of the Pay Comparator Group’s median annual incentive participation rates. However, no NEOs participated in the 2019 STIP, other than Messrs. Welsch and Christopher, who were eligible for STIP awards in 2019, prior to becoming executive officers and Chapter 11 Insiders.

2018 STIP Award Payouts

For 2018 awards, normally payable in 2019, the prior Compensation Committee and the independent members of each of the PG&E Corporation and Utility Boards of Directors exercised their discretion to eliminate awards for NEOs and the PG&E Corporation CEO and Pacific Gas and Electric Company principal executive officers, setting the companies’ score to zero. No STIP awards were paid to NEOs in 2019 in respect of 2018 awards.

One-Time Payments

As previously noted, 2019 included unusual one-time elements of pay for a limited number of officers.

Messrs. Johnson and Vesey each received cash transition payments of $3 million and $1 million, respectively, in connection with their hire as CEO and President of PG&E Corporation and the Utility, respectively. Such payments were made to cover transition costs associated with joining the companies. We believe the value of these payments is reasonable as compared to peer practices, and each of these transition payments is subject to clawback if the recipient resigns or is terminated for cause within 12 months of hire.

Mr. Lewis received a cash award of $125,000 as part of his promotion to Senior Vice President, Electric Operations, subject to clawback if he resigns or is terminated for cause within 24 months of the award.

Components of Officer Compensation – Equity

Annual Equity Incentives Granted in 2019

No equity incentive awards were awarded to NEOs in 2019, other than equity incentive awards granted to Mr. Johnson and Mr. Vesey as part of their initial compensation packages, as described in detail below.

Mr. Johnson’s Awards

Mr. Johnson’s three-year compensation arrangement includes both (a) annual awards of RSUs and performance shares and (b) a one-time grant of performance-based options. The Committee and the PG&E Corporation Board believe that this mix of equity-based awards will incentivize Mr. Johnson to drive the immediate results and long-term progress required in light of the difficulties faced by the companies in connection with the Chapter 11 Cases and the companies’ related financial and operating challenges.

Annual RSU and Performance Share Awards

Mr. Johnson’s annual RSU and Performance Share target value for 2019 was $2.3 million, representing his annual target value of $3.5 million, pro-rated for the eight months he was employed by PG&E Corporation in 2019.

The 2019 annual equity incentive is allocated (a) 25 percent to RSUs vesting one-third on each anniversary of the applicable grant date for the first three years following grant, and (b) 75 percent to performance shares vesting on December 31, 2019. Mr. Johnson’s award was granted on August 14, 2019, following approval by the Bankruptcy Court and consistent with the PG&E Corporation Equity Grant Date Policy (see discussion below under “Equity Grant Dates”).

The number of RSUs and performance shares granted to Mr. Johnson was determined by calculating 25 percent and 75 percent, respectively, of the incentive target value for 2019 and dividing the result by the grant date fair value as determined by the volume-weighted average price of PG&E Corporation stock for the 15 trading days prior to the announcement of Mr. Johnson’s hire.

The performance-based vesting conditions applicable to Mr. Johnson’s 2019 performance shares are weighted as follows: 65 percent for safety-based performance conditions, 25 percent for financial-based performance conditions, and 10 percent for customer-based performance conditions, generally mirroring the companies’ 2019 STIP. Additionally, Mr. Johnson’s 2019 performance shares are subject to the PSI Modifier. The addition of the PSI Modifier further aligns pay with performance related to safety, with a particular focus on wildfire safety. With respect to Mr. Johnson’s performance shares, the PSI Modifier operates as follows:

The performance period for Mr. Johnson’s award began April 1, 2019 and ended December 31, 2019. The measures and related weightings, thresholds, targets, maximums, and results used in calculating the performance score for Mr. Johnson’s award were as follows:

 

There was no reduction of the overall score based on PSI Modifier results (which were above target).

The payment for performance shares in the annual equity incentive was calculated by multiplying (1) the number of vested performance shares by (2) the overall performance score.

2019 ANNUAL EQUITY INCENTIVE PERFORMANCE SHARE PAYOUTS

In addition to the general anti-dilution provisions in the LTIP (that are triggered in the event of a change in the capital structure of the Corporation), Mr. Johnson’s RSUs and performance shares are subject to adjustment in order to protect these awards from dilution in the event of (i) a spin-off to existing shareholders, (ii) a rights offering to existing shareholders, or (iii) any other transaction in which existing shareholders receive the same anti-dilution protections as Mr. Johnson.  These anti-dilution protections are subject to adjustment by the Board and must be consistent with the Bankruptcy Court’s order entered at Docket No. 3546 approving these anti-dilution protections.

Performance-based Options

One-time performance-based stock options were granted to Mr. Johnson in August 2019, following approval of the Bankruptcy Court and consistent with the Equity Grant Date Policy. These performance-based options have the following terms:

PG&E CORPORATION CEO 2019 PERFORMANCE-BASED STOCK OPTIONS

The exercise price for each tranche was higher than the per share price of PG&E Corporation common stock on the grant date.

Each tranche of performance-based stock options vests according to the following schedule: one-third on each of December 31 of 2019, 2020, and 2021, subject to meeting the applicable performance targets. The performance-based vesting conditions and overall performance score applicable to the portion of Mr. Johnson’s 2019 stock options vesting December 31, 2019, were the same as described above for his annual equity incentive awards, including the modifier based on the results of the PSI Modifier. Performance measures for 2020 and 2021 will be approved by the PG&E Corporation Board in subsequent years, to reflect the operational and financial goals of the companies at that time.

Mr. Johnson’s performance-based options are subject to the same anti-dilution provisions as his RSUs and performance shares.

Mr. Vesey’s Awards

Mr. Vesey’s annual equity incentive target value for 2019 was approximately $830,000, representing his annual target value of $2 million pro-rated for the five months he was employed by PG&E Corporation in 2019. Mr. Vesey’s award was granted on November 12, 2019, following approval from the Bankruptcy Court, and consistent with the PG&E Corporation Equity Grant Date Policy.

The number of RSUs and performance shares granted to Mr. Vesey was determined by calculating 25 percent and 75 percent, respectively, of the incentive target value for 2019 and dividing the result by the grant date fair value as determined by the average closing price of PG&E Corporation stock for the 15 trading days prior to Mr. Vesey’s employment start date.

Mr. Vesey’s awards are subject to the same performance-based vesting conditions as Mr. Johnson’s 2019 annual awards (see description above). The performance period for Mr. Vesey’s award began July 1, 2019 and ended December 31, 2019. The measures and related weightings, thresholds, targets, maximums, and results used in calculating the performance score for Mr. Vesey’s award were as follows:

There was no reduction of the overall score based on PSI Modifier (which was above target).

The payment for performance shares in the annual equity incentive was calculated by multiplying (1) the number of vested performance shares by (2) the overall performance score.

2019 ANNUAL EQUITY INCENTIVE PERFORMANCE SHARE PAYOUTS

Mr. Vesey’s performance shares are subject to the same anti-dilution provisions as Mr. Johnson’s equity awards, described above.

Performance Shares Vested in 2019

The three-year performance cycle for annual performance share awards that were granted in 2016 under the 2014 LTIP ended on December 31, 2018. These awards vested on March 1, 2019, and payouts are reported in the table entitled “Option Exercises and Stock Vested During 2019.”

Fifty percent of awards granted under the LTIP in 2016 were allocated to performance shares using a relative TSR measure. For that performance period, PG&E Corporation’s TSR fell below all others when compared to the 14 companies in the 2016 Performance Comparator Group. This ranking resulted in no payout with respect to the 2016 performance share awards using a TSR measure. PG&E Corporation’s TSR performance for the three-year period was negative 50.5 percent, as compared to the median TSR of 51.2 percent among the 2016 Performance Comparator Group companies for the same period.

Ten percent of awards granted under the LTIP in 2016 were allocated to performance shares with the payout determined by measuring performance against equally-weighted safety and affordability goals. Safety performance, as measured by the 2016 through 2018 Lost Workday Case Rate was below the threshold target. Affordability, as measured by three-year efficiency gains versus a $100 million target, achieved a 2.0 score, with savings of $279 million, which is significantly above the $200 million maximum target. The overall result was a 100 percent payout in 2019 for these performance shares, which represented 10 percent of the total 2016 target LTIP award.

Performance Shares Vesting in 2020

Fifty percent of awards granted under the LTIP in 2017 were allocated to performance shares using a relative TSR measure, with a three-year performance cycle ended on December 31, 2019. These awards vested on February 20, 2020, and the payouts for these awards, if any, will be reflected in the 2021 proxy statement. For the 2017 LTIP performance period, PG&E Corporation’s TSR ranked last among the 14 companies in the 2017 Performance Comparator Group. This ranking resulted in no payout with respect to the 2017 performance share awards using a TSR measure. PG&E Corporation’s TSR performance for the three-year period was negative 82 percent, as compared to the median TSR of 49 percent among the 2017 Performance Comparator Group companies for the same period. The average closing price over the prior 20 days is used to determine the beginning and ending values for the calculation.

Ten percent of awards granted under the LTIP in 2017 were allocated to performance shares with the payout determined by measuring performance against equally weighted safety performance and financial performance goals. Safety performance, as measured by 2017 through 2019 Serious Injuries and Fatalities: Effectiveness of Corrective Actions was above the maximum performance level. Financial performance, as measured by three-year Average Non-GAAP Earnings From Operations per Share was above target. The overall result was a 152 percent payout in 2020 for these performance shares.

Equity Grant Dates

The PG&E Corporation Equity Grant Date Policy, as last amended in September 2017 (the “Equity Grant Date Policy”), generally provides that annual LTIP awards, if any, are granted once per year on March 1 (or if that day is not a business day, then on the following business day). The PG&E Corporation Board or the Committee may determine a different grant date if appropriate or necessary. The grant date for non-annual equity awards to employees (such as for newly hired or newly promoted officers or awards made for retention, recognition, or other purposes) is the later of (1) the date that the non-annual award is approved by the independent members of the PG&E Corporation or Utility Board, the Committee, or the PG&E Corporation CEO, as applicable, (2) the effective date of the LTIP award recipient’s employment, promotion, or recognition, or (3) the date otherwise specified by the applicable Board, the Committee, or the PG&E Corporation CEO. If the grant date of any non-annual LTIP award would occur during a trading blackout period, as defined under the companies’ Insider Trading Policy, then the actual grant date will be the first business day after the trading blackout period ends.

Other Elements of Executive Compensation in 2019

Perquisites and Related Compensation

NEOs generally receive a limited range of perquisite benefits, typically encompassing a partial subsidy for financial planning services from a third-party financial advisory firm, partial reimbursement of certain health club fees, on-site parking, executive health services, and de minimis perquisites under a pre-approved perquisite policy. The PG&E Corporation and Utility CEOs also may receive safety-and security-based car transportation services. (In 2019, such transportation services were also provided to the Interim CEO of PG&E Corporation.) The magnitude of these perquisites, including the lump-sum payment described in the following paragraph, is comparable to that provided to executive officers of companies in the Pay Comparator Group, and the value of these services is taxable to the recipient.

The Committee (and the independent members of the PG&E Corporation Board in the case of Mr. Johnson, and the independent members of the Utility Board in the case of Mr. Vesey) also approved a 2019 lump-sum annual stipend amount for each executive officer of PG&E Corporation and the Utility consistent with 2018, which ranged from $15,000 to $35,000 (the upper end applicable only to Mr. Johnson). This stipend is provided in lieu of providing the NEOs with additional perquisite benefits. The NEOs have discretion to use this stipend as they see fit.

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⁵ For years when guidance is not provided, final targets are approved by the board through the annual Financial Performance Plan.

 

The Utility’s Corporate Aircraft Use policy prohibits use of Utility aircraft by any individual, including by the companies’ executive officers, for personal travel.

Post-Retirement Benefits

NEOs are eligible to receive retirement benefits under the Utility’s tax-qualified defined benefit plan (“Retirement Plan”), which also provides benefits to other eligible employees of PG&E Corporation and the Utility. Retirement Plan benefits are in the form of either a final average pay pension benefit or a cash balance benefit. During bankruptcy proceedings, lump sum payments of more than $5,000 under the Retirement Plan are not generally permitted.

Messrs. Wells and Simon and Ms. Loduca also are eligible to receive benefits pursuant to the enhanced pension formula in the PG&E Corporation Supplemental Executive Retirement Plan (“SERP”), which is a non-tax-qualified defined benefit pension plan that provides officers and key employees of PG&E Corporation and its subsidiaries, including the Utility, with an additional pension benefit. These plans are described in the section entitled “Pension Benefits—2019”. In February 2010, the Committee adopted a policy against crediting additional years of service for participants in the SERP. The change in pension value disclosed in the Summary Compensation Table is impacted by service of the participant, compensation, changes in interest rates, among other assumptions.  Mr. Messrs. Malnight and Soto, and Ms. Williams also participated in the SERP prior to their separation from service.

Messrs. Johnson, Vesey, Lewis, Thomason, and Welsch participate in the 2013 PG&E Corporation Defined Contribution Executive Supplemental Retirement Plan (“DC-ESRP”), a non-tax-qualified defined contribution pension plan. Effective January 1, 2013, SERP participation was closed to new participants. Individuals who did not participate in the SERP but who were newly hired or promoted to officer after January 1, 2013 are eligible for payments under the DC-ESRP. The DC-ESRP is described in more detail in the section entitled “Non-qualified Deferred Compensation – 2019”. Messrs. Christopher and Hogan also participated in the DC-ESRP prior to their separation from service,

NEOs and other officers and employees also are eligible to participate in the PG&E Corporation Retirement Savings Plan (“RSP”), a tax-qualified 401(k) plan. PG&E Corporation provides a maximum matching contribution of 75 cents for each dollar contributed, up to six percent of base salary for individuals eligible for the final average pay pension benefit and up to eight percent of base salary for individuals eligible for a cash balance pension benefit. To the extent that the Internal Revenue Code limits prevent an NEO from making contributions to his or her RSP account and, as a result, company matching funds are not contributed to that NEO’s RSP account, the matching funds will instead be contributed to the NEO’s account in the PG&E Corporation 2005 Supplemental Retirement Savings Plan (“SRSP”), a non-qualified deferred compensation plan.

Upon retirement, NEOs also may be eligible for post-retirement health, welfare, insurance, and similar benefits, pursuant to plans that generally provide benefits to all employees. Additional details regarding the retirement programs and post-retirement benefits, and the value of pension benefits accumulated as of December 31, 2019 for the NEOs, can be found in the table entitled “Pension Benefits—2019”, the table entitled “Non-qualified Deferred Compensation—2019”, and the section entitled “Potential Payments—Resignation/Retirement”.

Most companies in the 2019 Pay Comparator Group provide tax-qualified pensions or similar plans, other tax-qualified defined contribution plans (e.g., 401(k) plans), and non-tax-qualified retirement plans for NEOs. The Committee believes that these defined benefit and defined contribution plans offer significant recruiting and retention incentives.

The Chapter 11 Cases have limited the companies’ ability to pay post-retirement benefits to all participants in the SERP and DC-ESRP and to SERP participants who left the companies prior to the filing of the Chapter 11 Cases.

Officer Severance Program

General severance benefits are provided to NEOs through the 2012 PG&E Corporation Officer Severance Policy (“Officer Severance Policy”) and specific LTIP award agreements. Upon termination by either company (other than for cause), NEOs may be eligible for cash severance payments, continued or accelerated vesting for LTIP awards, and other post-employment benefits. If an NEO is terminated for cause (e.g., for dishonesty, a criminal offense, or violation of a work rule) or resigns before becoming retirement-eligible, under the terms of the applicable LTIP award agreements the NEO would forfeit any unvested performance shares, stock options, and RSUs, and would not receive any associated dividends.

Payment of the severance benefit levels described below are limited due to the Chapter 11 Cases. Payment of severance benefits due to Messrs. Soto and Christopher under the Officer Severance Policy were suspended due to the Chapter 11 Cases, as was payment of a portion of the severance benefit payments due to Ms. Williams and Mr. Hogan.

Officer Severance Policy

The purpose of the Officer Severance Policy is to (1) attract and retain senior management by providing severance benefits that are part of a competitive total compensation package, (2) provide consistent treatment for all terminated officers, and (3) minimize potential litigation costs in connection with terminations of employment by conditioning payments upon a general release of claims.

In lieu of participating in the Officer Severance Policy, Mr. Johnson’s three-year employment arrangement provides that, if he was terminated without cause in 2019, he would have been eligible to receive a prorated target incentive payment based on the time worked during the year plus a $2.5 million cash payment. If he is terminated without cause in 2020 or 2021, he is eligible to receive a prorated prior year’s earned incentive payment (if any) based on the time worked during the year plus a $2.5 million cash payment. These proration principles also apply in principle to treatment of Mr. Johnson’s 2019 equity awards upon termination without cause. Further, if Mr. Johnson resigns voluntarily or is terminated without cause, he is entitled to retain his vested options, which are exercisable for the entire term of the option. Mr. Johnson’s unvested options are forfeited upon a voluntary resignation or a termination without cause at any time.

The Officer Severance Policy, in combination with LTIP award agreements, generally provides the following benefits upon termination without cause:

Additional details regarding severance benefits can be found in the section entitled “Potential Payments—Termination Without Cause.”

Change in Control

Providing change-in-control severance benefits is a key part of the companies’ officer compensation program and typical market practice. In a hostile takeover or other change-in-control situation, it is important for management to remain focused on maximizing shareholder value and aligning management’s interests with shareholders’ interests, and not to be distracted by concerns about job security.

Change-in-control benefits require a “double trigger” and are not payable based on a change-in-control event alone, as described below. The Committee believes that the “double-trigger” requirement aligns our change-in-control benefits with shareholder interests and reflects current market practices.

The Officer Severance Policy provides enhanced cash severance benefits if the officer’s employment is terminated (including constructive termination by the officer for good reason) in connection with a Change in Control (as defined in the Policy). These enhanced benefits replace general severance benefits and are available only to officers in bands 1 or 2, which, as of December 31, 2019, included Messrs. Johnson, Vesey, Wells, and Simon, and Ms. Loduca. Covered officers are eligible to receive (1) change-in-control cash severance benefits equal to two times the sum of base salary and target annual STIP and (2) prorated STIP for the year of termination. Other NEOs receive general severance benefits only.

All LTIP award agreements contain change-in-control provisions that accelerate vesting of all awards if there is a Change in Control, and either the award is not continued, assumed, or substituted, or the recipient’s employment is terminated in connection with a Change in Control. This practice aligns PG&E Corporation and the Utility with market practices and (1) better balances the interests of award recipients and shareholders, (2) provides security for award recipients in a time of uncertainty, and (3) preserves the incentive for award recipients to stay with PG&E Corporation or the Utility even following a transaction.

The Golden Parachute Restriction Policy requires shareholder approval of certain executive severance payments (as defined in the Golden Parachute Restriction Policy) provided in connection with a change in control of PG&E Corporation, to the extent that those payments exceed 2.99 times the sum of a covered officer’s base salary and target STIP award.

Additional details regarding change-in-control benefits can be found in the section entitled “Potential Payments—Severance in Connection with Change in Control.”

5. 2020 NEO COMPENSATION STRUCTURE

The Committee has worked closely with its advisors and the companies to redesign the 2020 executive compensation programs, which will apply both pre-and post-emergence from the Chapter 11 Cases.  The Committee believes that the redesigned short- and long-term performance-based compensation programs not only meet, but exceed, the mandates of AB 1054 by prioritizing public safety and customer welfare, without sacrificing financial stability. The 2020 executive compensation programs balance key safety, customer welfare and financial issues facing the companies with the need to continue to recruit and retain qualified executives to guide the companies through a period of uncertainty (including the unpredictability of the stock price). Since the 2020 long-term performance awards will be paid in post-emergence equity, stock price volatility will have an effect on the incentive and retentive value of such awards earned by certain executives, some of whom may be NEOs.

6. COMMITTEE CONCLUSION

The bankruptcy filing resulted in an interruption of performance-based compensation in 2019 for certain executives of the companies, some of which are NEOs. The Committee believes that the measures, metrics and amounts contemplated by the  2020 re-design of executive compensation  are consistent with the Committee’s compensation objectives and policies to (1) provide long-term incentives to align shareholders’ and officers’ interests and enhance total return for shareholders, (2) attract, retain, and motivate officers with the necessary mix of skills and experience for the development and successful operation of PG&E Corporation’s and the Utility’s businesses, including in the area of public safety and customer welfare, and (3) compensate NEOs in a competitive, cost-efficient, and transparent manner, consistent with the restrictions on executive compensation imposed by Chapter 11 and AB 1054.

 

V.  Executive Officer Compensation Information

Employment Arrangements – Mr. Johnson

In general, NEOs do not have individualized employment contracts. Instead, NEO compensation is provided consistent with established officer plans and programs and is set as part of the annual officer pay planning process.

However, Mr. Johnson has a three-year employment arrangement with PG&E Corporation. As noted in the Current Report filed with the SEC on April 16, 2019, Mr. Johnson’s compensation incudes (a) a base salary of $2.5 million annually, (b) a one-time transition payment of $3 million on the first day of his employment, which is subject to clawback in the event Mr. Johnson resigns or is terminated for cause within 12 months of his start date, (c) standard relocation expenses, (d) an annual equity award with a target value of $3.5 million, with 25% of such award consisting of time-based RSUs and 75% of such award consisting of performance shares, and (e) a one-time grant of three tranches of performance-based stock options as follows: (i) tranche 1 consists of a maximum 1.2 million options (i.e. 800,000 options at target-level performance) with an exercise price of $25.00 per share exercisable until the fourth anniversary of the grant date, (ii) tranche 2 consists of a maximum 1.5 million options (i.e. 1 million options at target-level performance) with an exercise price of $40.00 per share exercisable until the fourth anniversary of the grant date, and (iii) tranche 3 consists of a maximum 1.6 million options (i.e. approximately 1.1 million options at target-level performance) with an exercise price of $50.00 per share exercisable until the fifth anniversary of the grant date, in each case subject to forfeiture if Mr. Johnson is terminated for cause. With respect to Mr. Johnson’s RSU and 2019 performance share awards, upon termination without cause RSUs and 2019 performance shares vest proportionately based on the number of months Mr. Johnson was employed during the vesting or performance period, as applicable. Upon termination without cause, Mr. Johnson’s 2020 and 2021 performance shares will vest, and settlement amounts will be determined, based on achievement of performance metrics for performance shares granted for the previously year All equity-based awards are subject to clawback under the Executive Incentive Compensation Recoupment Policy (described in more detail in the CD&A under the section entitled “Clawback Policy”). If Mr. Johnson is terminated other than for cause during the three-year term of his employment arrangement, he will be entitled to a cash severance payment of $2.5 million. Mr. Johnson’s equity incentive awards are subject to anti-dilution provisions upon a spin-off to shareholders and in connection with a rights offering to shareholders or other transactions in which shareholders are subject to the same anti-dilution protections as Mr. Johnson.

 

The above perquisites and personal benefits consist of the following:

In addition to the perquisite benefits described above, NEOs are given a set stipend that each NEO may use as the officer sees fit. The stipend is intended to cover miscellaneous items in each NEO’s discretion (such as membership in professional organizations). The amount of this stipend is included in the Summary Compensation Table in the “All Other Compensation” column and is addressed in section (ii) of footnote 6. NEOs also were eligible to receive on-site parking, which was provided at no additional incremental cost to PG&E Corporation and the Utility.

Please see the CD&A for additional information regarding the elements of compensation discussed above, including information regarding salary, short-term incentives, and long-term incentives. Additional information regarding grants of LTIP awards can be found in the narrative following the “Grants of Plan-Based Awards in 2019” table.

 

Detailed information regarding compensation reported in the tables entitled “Summary Compensation Table—2019” and “Grants of Plan-Based Awards in 2019,” including the relative amounts apportioned to different elements of compensation, can be found in the CD&A. Information regarding specific grants and arrangements is provided below.

STIP Awards

Information regarding the terms and basis of STIP awards can be found in the CD&A. No NEOs were eligible for STIP in 2019 other than Messrs. Welsch and Christopher, who were participants in the 2019 STIP prior to their election as executive officers and Chapter 11 Insiders, and received STIP payments in 2019, as reported in the table entitled “Summary Compensation Table—2019.” No future payout related to 2019 STIP is due to any NEO as of December 31, 2019.

Performance Shares

Performance shares granted to the PG&E Corporation and Utility CEOs as part of their 2019 annual equity incentives vested on December 31, 2019. Upon vesting, performance shares are settled in shares of PG&E Corporation common stock, net of the number of shares having a value equal to required withholding taxes. The number of shares issued is based on achievement of performance goals. The specific payout formulas are discussed in the CD&A. No other executive officers received grants of performance shares in 2019.

Each time that a cash dividend is paid on PG&E Corporation common stock, an amount equal to the cash dividend per share multiplied by the number of performance shares granted to the recipient will be accrued on behalf of the recipient. At the end of the vesting period, the amount of accrued dividend equivalents will be increased or decreased by the same payout factor used to increase or decrease the number of vested performance shares for the period. Accrued dividends are paid out in cash at the time the related performance shares are settled. Due to the suspension of the PG&E Corporation stock dividend since December 2017, no dividends have accrued on performance shares granted in 2019.  Additionally, lump-sum cash payout of accrued dividends on shares from grants made prior to December 2017 that vested in 2019 were suspended during the pendency of the Chapter 11 Cases.

Restricted Stock Units

RSUs granted to the PG&E Corporation and Utility CEOs as part of their 2019 annual equity incentives will vest in three tranches, with one-third vesting on the anniversary of the grant dates for the three years following the grant dates. No other executive officers received grants of RSUs in 2019. Upon vesting, RSUs are settled in an equivalent number of shares of PG&E Corporation common stock, net of the number of shares having a value equal to required withholding taxes. All RSUs may be subject to earlier vesting or forfeiture upon certain events, in accordance with the terms of the grant.

Each time that a cash dividend is paid on PG&E Corporation common stock, an amount equal to the cash dividend per share multiplied by the number of outstanding RSUs granted to the recipient will be accrued on behalf of the recipient. Accrued dividends are paid in cash at the time that the related RSUs are settled. Due to the suspension of the PG&E Corporation stock dividend in December 2017, no dividends accrued on RSUs granted in 2019.  Additionally, lump-sum cash payout of accrued dividends on shares from grants made prior to December 2017 that vested in 2019 were suspended during the pendency of the Chapter 11 Cases.

Stock Options

Performance-based stock options granted to the PG&E Corporation CEO in 2019 will vest in three tranches, with one-third vesting on December 31 of each of the three years following the grant date. The number of options vested is based on achievement of performance goals. The specific payout formulas are discussed in the CD&A. Upon vesting, Mr. Johnson may elect to pay the option exercise price and receive a share of PG&E Corporation stock for each option exercised. Mr. Johnson’s performance-based vested options expire at the close of business four years after the date of grant (in the case of Tranches 1 and 2), or five years after the date of grant (in the case of Tranche 3), after which time the options cease to be exercisable. The exercise price of each option was determined by the PG&E Corporation Board of Directors at the time they approved Mr. Johnson’s compensation arrangement for 2019 and is specified in the award agreement.

No tandem dividend equivalents are granted with stock options.