As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 4/02/08  Conocophillips                    DEF 14A     5/14/08    1:249                                    RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: DEF 14A     Definitive Proxy Statement                          HTML  1,477K 

NOTICE OF

2008

ANNUAL STOCKHOLDERS MEETING

 

MAY 14, 2008

 

and

 

PROXY STATEMENT

 

Wednesday

May 14, 2008

9:30 a.m. local time

 

Omni Houston Hotel at Westside

13210 Katy Freeway

Houston, Texas 77079

 

April 2, 2008

 

Dear ConocoPhillips Stockholder:

 

On behalf of your board of directors and management, you are cordially invited to attend the Annual Meeting of Stockholders to be held at the Omni Houston Hotel at Westside, 13210 Katy Freeway, Houston, Texas, on Wednesday, May 14, 2008, at 9:30 a.m.

 

It is important that your shares be represented at the meeting. This proxy statement, the accompanying proxy card and the Company’s 2007 Annual Report to Stockholders are first being mailed and made available on the internet at www.proxyvote.com through the notice and access process to the Company’s stockholders on or about April 2, 2008. Whether or not you plan to attend the meeting, please either submit your proxy using the Internet or telephone procedures provided on the notice and access card or, if you have elected to receive a copy of your proxy card in the mail, complete and return the enclosed proxy card in the accompanying envelope. Please note that submitting a proxy using any one of these methods will not prevent you from attending the meeting and voting in person. You will find information regarding the matters to be voted on at the meeting in the proxy statement.

 

In addition to the formal items of business to be brought before the meeting, there will be a report on ConocoPhillips’ operations during 2007 followed by a question and answer period. Your interest in ConocoPhillips is appreciated. We look forward to seeing you on May 14^th.

 

Sincerely,
J. J. Mulva Chairman of the Board and Chief Executive Officer

Notice of 2008 Annual Meeting of Stockholders		1
About the Annual Meeting		2
Board of Directors Information		6
Election of Directors and Director Biographies (Proposal 1)		8
Proposed Annual Election of Directors (Proposal 2)		13
Corporate Governance Matters and Communications with the Board		14
Code of Business Ethics and Conduct		15
Related Party Transactions		15
Nominating Processes of the Committee on Directors’ Affairs		16
Role of the Compensation Committee		18
Compensation Committee Report		19
Compensation Discussion and Analysis		20
Stock Performance Graph		38
Executive Compensation Tables		39
Summary Compensation Table		39
Grants of Plan-Based Awards Table		44
Outstanding Equity Awards at Fiscal Year End		47
Option Exercises and Stock Vested		50
Pension Benefits		51
Nonqualified Deferred Compensation		55

Executive Severance and Changes in Control		57
Non-Employee Director Compensation		63
Equity Compensation Plan Information		70
Stock Ownership		71
Holdings of Major Stockholders		71
Securities Ownership of Officers and Directors		72
Section 16(a) Beneficial Ownership Reporting Compliance		73
Audit & Finance Committee Report		74
Proposal to Ratify the Appointment of Ernst & Young LLP (Proposal 3)		75
Stockholder Proposals (Proposals 4-12)		77
Solicitation by Board; Expenses of Solicitation		97
Submission of Future Stockholder Proposals		97
Available Information		97
Householding		97
Other Matters		98
Appendix A – Proposed Amendments to Restated Certificate of Incorporation		A-1
Appendix B – Proposed Amendments to Amended and Restated By-Laws		B-1

 About the Annual Meeting

 

Who is soliciting my vote?

 

The Board of Directors of ConocoPhillips is soliciting your vote at the Annual Meeting of ConocoPhillips’ stockholders.

 

What am I voting on?

 

You are voting on:

 

•

The election of three directors (see page 8);

 

•

A proposal to amend our Certificate of Incorporation and By-Laws to provide for the annual election of all members of the Board of Directors (see page 13);

 

•

The ratification of the appointment of Ernst & Young LLP as ConocoPhillips’ independent registered public accounting firm for 2008 (see page 75);

 

•

The consideration of 9 stockholder proposals (see pages 77 through 96); and

 

•

Any other business properly coming before the meeting.

 

How does the Board recommend that I vote my shares?

 

Unless you give other instructions on your proxy card, the persons named as proxy holders on the proxy card will vote in accordance with the recommendations of the Board of Directors. The Board’s recommendation can be found with the description of each item in this proxy statement. In summary, the Board recommends a vote:

 

•

FOR the Board’s proposal to elect nominated Directors;

 

•

FOR the Board’s proposal to amend our Certificate of Incorporation and By-Laws to provide for the annual election of all members of the Board of Directors;

 

•

FOR the Board’s proposal to ratify the appointment of Ernst & Young LLP as ConocoPhillips’ independent registered public accounting firm for 2008; and

 

 

 

 

•

AGAINST each of the stockholder proposals.

 

Who is entitled to vote?

 

You may vote if you were the record owner of ConocoPhillips common stock as of the close of business on March 17, 2008. Each share of common stock is entitled to one vote. As of March 17, 2008, we had 1,589,593,832 shares of common stock outstanding and entitled to vote. There is no cumulative voting.

 

How many votes must be present to hold the meeting?

 

Your shares are counted as present at the Annual Meeting if you attend the meeting and vote in person or if you properly return a proxy by Internet, telephone or mail. In order for us to hold our meeting, holders of a majority of our outstanding shares of common stock as of March 17, 2008, must be present in person or by proxy at the meeting. This is referred to as a quorum. Abstentions and broker non-votes will be counted for purposes of establishing a quorum at the meeting.

 

What is a broker non-vote?

 

If a broker does not have discretion to vote shares held in street name on a particular proposal and does not receive instructions from the beneficial owner on how to vote those shares, the broker may return the proxy card without voting on that proposal. This is known as a broker non-vote. Broker non-votes will have no effect on the vote for any matter properly introduced at the meeting.

 

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

 

The proposal to amend our Restated Certificate of Incorporation and Amended and Restated By-Laws to provide for the annual election of all members of the Board of Directors requires the affirmative “FOR” vote of 80% of the shares outstanding as of March 17, 2008.  All other proposals submitted and

each of the director nominees require the affirmative “FOR” vote of a majority of those shares present in person or represented by proxy at the meeting and entitled to vote on the proposal.

 

How do I vote?

 

You can vote either in person at the meeting or by proxy without attending the meeting.

 

This proxy statement, the accompanying proxy card and the Company’s 2007 Annual Report to Stockholders are being made available on the Internet at www.proxyvote.com through the notice and access process to the Company’s stockholders.

 

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

 

•

Vote over the Internet (instructions are on the proxy card);

 

•

Vote by telephone (instructions are on the proxy card); or

 

•

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

 

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

 

Even if you plan to attend the meeting, we encourage you to vote your shares by proxy. If you plan to vote in person at the Annual Meeting and you hold your ConocoPhillips stock in street name, you must obtain a proxy from your broker and bring that proxy to the meeting.

 

How do I vote if I hold my stock through ConocoPhillips’ employee benefit plans?

 

If you hold your stock through ConocoPhillips’ employee benefit plans, you must either:

 

•

Vote over the Internet (instructions are on the notice and access form);

 

•

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

 

•

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

 

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

 

Can I change my vote?

 

Yes. You can change or revoke your vote at any time before the polls close at the Annual Meeting. You can do this by:

 

•

Voting again by telephone or over the Internet prior to 11:59 p.m. Eastern Daylight Time on May 13, 2008;

 

•

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

 

•

Sending our Corporate Secretary a written document revoking your earlier proxy; or

 

•

Voting again at the meeting.

 

Who counts the votes?

 

We have hired Broadridge Financial Solutions, Inc. (formerly ADP), to count the votes represented by proxies cast by ballot, telephone, and the Internet. Employees of Broadridge will act as Inspectors of Election.

 

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

 

If you do not provide a proxy or vote your shares held in your name, your shares will not be voted.

 

If you hold your shares in street name, your broker may be able to vote your shares for certain “routine”

matters even if you do not provide the broker with voting instructions. The election of directors, the proposal to amend our Certificate of Incorporation and By-Laws to provide for the annual election of all members of the Board of Directors, and the ratification of Ernst & Young LLP as our independent registered public accounting firm for 2008 are considered routine matters.

 

If you do not give your broker instructions on how to vote your shares, for matters not considered “routine,” the broker may return the proxy card without voting on that proposal. This is a broker non-vote. Votes in connection with the 9 stockholder proposals are not considered routine matters. The broker may not vote on the stockholder proposals absent instructions from you. Without your instructions, a broker non-vote will occur.

 

As more fully described on your proxy card, if you hold your shares through certain of ConocoPhillips’ employee benefit plans and do not vote your shares, your shares (along with all other shares in the plan for which votes are not cast) may be voted pro rata by the trustee in accordance with the votes directed by other participants in the plan who elect to act as a fiduciary entitled to direct the trustee of the applicable plan on how to vote the shares.

 

How are votes counted?

 

For all proposals, you may vote “FOR,” “AGAINST,” or “ABSTAIN.” If you “ABSTAIN,” it has the same effect as a vote “AGAINST.”

 

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

 

If you return a signed proxy card without indicating your vote, your shares will be voted “FOR” the director nominees listed on the card, “FOR” the proposal to amend our Certificate of Incorporation and By-Laws providing for the annual election of all members of the Board of Directors, “FOR” the ratification of Ernst & Young LLP as ConocoPhillips’ independent registered public accounting firm for 2008 and “AGAINST” each of the stockholder proposals.

 

Could other matters be decided at the Annual Meeting?

 

We are not aware of any other matters that will be considered at the Annual Meeting. If any other matters are properly brought before the Annual Meeting, the persons named in your proxies will vote in accordance with their best judgment.

 

Who can attend the meeting?

 

The Annual Meeting is open to all holders of ConocoPhillips common stock. Each stockholder is permitted to bring one guest. No cameras, recording equipment, large bags, briefcases or packages will be permitted in the Annual Meeting, and security measures will be in effect in order to ensure the safety of attendees.

 

Do I need a ticket to attend the Annual Meeting?

 

Yes, you will need an admission ticket or proof of ownership of ConocoPhillips stock to enter the meeting. If your shares are registered in your name, you will find an admission ticket attached to the proxy card sent to you. If your shares are in the name of your broker or bank or you received your materials electronically, you will need to bring evidence of your stock ownership, such as your most recent brokerage statement. All stockholders will be required to present valid picture identification. IF YOU DO NOT HAVE VALID PICTURE IDENTIFICATION AND EITHER AN ADMISSION TICKET OR PROOF THAT YOU OWN CONOCOPHILLIPS STOCK, YOU MAY NOT BE ADMITTED INTO THE MEETING.

 

How can I access ConocoPhillips’ proxy materials and annual report electronically?

 

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

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

 

If you choose to view future proxy statements and annual reports over the Internet, you will receive a Notice of Internet Availability next year containing the Internet address to use to access our proxy statement and annual report. Your choice will remain in effect unless you change your election following the receipt of a Notice of Internet Availability. You do not have to elect Internet access each year. If you later change your mind and would like to receive paper copies of our proxy statements and annual reports, you can request both by phone at (800) 579-1639, email at sendmaterial@proxyvote.com and through the internet at www.proxyvote.com. You will need your 12-digit control number located on your Notice of Internet Availability to request a package. You will also be provided with the opportunity to receive a copy of the proxy statement and annual report in future mailings.

 

If you do not elect electronic delivery of future proxy statements and annual reports, we may elect to post the proxy statement and annual report on an Internet site, which we are permitted to do under a new Securities and Exchange Commission rule, and we will send you a notice of the Internet posting.

 Board of Directors Information

 

What is the makeup of the Board of Directors and how often are the members elected?

 

Our Board of Directors currently has 17 members. Our Board is classified into three classes serving staggered three-year terms. Directors for each class are elected at the Annual Meeting of Stockholders held in the year in which the term for their class expires. Any director vacancies created between meetings (such as by a current director’s death, resignation or removal for cause or an increase in the number of directors) may be filled by a majority vote of the remaining directors then in office. Any director appointed in this manner would hold office until the next election for his or her respective class. If a vacancy resulted from an action of our stockholders, only our stockholders are entitled to elect a successor.

 

A proposal to declassify the Board and require the annual election of all directors is being submitted for your consideration and approval. Please see “Proposed Annual Election of Directors” beginning on page 13.

 

What if a nominee is unable or unwilling to serve?

 

That is not expected to occur. If it does, shares represented by proxies will be voted for a substitute nominated by the Board of Directors.

 

What if a director nominee does not receive a majority of votes cast?

 

If a nominee who is serving as a director is not elected at the annual meeting and no one else is elected in place of that director, then, under Delaware law, the director would continue to serve on the Board as a “holdover director.” However, under our By-Laws, the holdover director is required to tender his or her resignation to the Board. The Committee on Directors’ Affairs would then make a recommendation to the Board whether to accept or reject the tendered resignation, or whether some other action should be taken. The Board of Directors would then make a

decision whether to accept the resignation taking into account the recommendation of the Committee on Directors’ Affairs. The Board is required to publicly disclose (by a press release, a filing with the SEC or other broadly disseminated means of communication) its decision regarding the resignation and the rationale behind the decision within 90 days from the date of the certification of the election results.

 

How are directors compensated?

 

Please see our discussion of director compensation beginning on page 63.

 

How often did the Board meet in 2007?

 

The Board of Directors met eight times in 2007. Each director attended at least 75 percent of the aggregate of:

 

•

the total number of meetings of the Board (held during the period for which she or he has been a director); and

 

•

the total number of full-committee meetings held by all committees of the Board on which she or he served (during the periods that she or he served).

 

Do the Board committees have written charters?

 

Yes. The charters for our Audit and Finance Committee, Executive Committee, Compensation Committee, Committee on Directors’ Affairs and Public Policy Committee can be found on ConocoPhillips’ website at www.conocophillips.com under the “Corporate Governance” caption (accessed through the “Investor Information” link). Stockholders may also request printed copies of our Board committee charters by following the instructions located under the caption “Available Information” on page 97.

		Harold W. McGraw III, 59, Director since September 2005

•

Chairman, President and Chief Executive Officer of The McGraw-Hill Companies since 2000

•

President and Chief Executive Officer of The McGraw-Hill Companies 1998 to 2000

•

President and Chief Operating Officer of The McGraw-Hill Companies from 1993 to 1998

•

Member of the Board of:

•

The McGraw-Hill Companies

•

United Technologies Corporation

 

		James J. Mulva, 61, Director since August 2002

•

Chairman of the Board of ConocoPhillips since October 2004

•

President and Chief Executive Officer of ConocoPhillips since August 2002

•

Director of Phillips Petroleum Company from 1994 to 2002

•

Chairman of the Board of Directors and Chief Executive Officer of Phillips Petroleum Company from October 1999 to August 2002

•

Vice Chairman of the Board of Directors, President and Chief Executive Officer of Phillips Petroleum Company from June 1999 to October 1999

•

President and Chief Operating Officer of Phillips Petroleum Company from 1994 to June 1999

 

		Bobby S. Shackouls, 57, Director since March 2006

•

Chairman of the Board of Burlington Resources Inc. from July 1997 through March 2006

•

President and Chief Executive Officer of Burlington Resources Inc. from December 1995 through March 2006

•

Member of the Board of:

•

The Kroger Co.

 

What does the Board recommend?

 

THE BOARD RECOMMENDS THAT

YOU VOTE “FOR” THE ELECTION

OF THESE DIRECTORS

		Richard L. Armitage, 62, Director since March 2006

•

President, Armitage International LLC, since March 2005

•

U.S. Deputy Secretary of State from March 2001 to February 2005

•

President, Armitage Associates, a worldwide business and public policy firm, from 1993 to 2001.

•

A variety of high-ranking U.S. diplomatic positions from 1989 to 1993 including: Special Mediator for Water in the Middle East; Special Emissary to King Hussein of Jordan during the 1991 Gulf War; Ambassador, directing U.S. assistance to the newly independent states of the former Soviet Union.

•

Assistant U.S. Secretary of Defense for International Security Affairs from 1983 to 1989

•

Member of the Board of:

•

ManTech International Corporation

 

		Richard H. Auchinleck, 56, Director since August 2002

•

Director of Conoco Inc. from 2001 to 2002

•

President and Chief Executive Officer of Gulf Canada Resources Limited from February 1998 to June 2001

•

Chief Operating Officer of Gulf Canada from July 1997 to February 1998

•

Chief Executive Officer for Gulf Indonesia Resources Limited from September 1997 to February 1998

•

Member of the Board of:

•

Enbridge Commercial Trust

•

Telus Corporation

 

		Harald J. Norvik, 61, Director since July 2005

•

Chairman and Partner, Econ Management AS from June 2002 to present

•

Chairman, President & CEO of Statoil from January 1988 to October 1999

•

Chairman of the Board of Telenor ASA from May 2007 to present

•

Member of the Board of:

•

Petroleum Geo-Services ASA

 

		William K. Reilly, 68, Director since August 2002

•

Director of Conoco Inc. from 1998 to 2002

•

President and Chief Executive Officer of Aqua International Partners, an investment group which finances water improvements in developing countries, since June 1997

•

Former Administrator of the U.S. Environmental Protection Agency 1989 to 1993

•

Member of the Board of:

•

E. I. du Pont de Nemours & Company

•

Royal Caribbean Cruises Ltd.

		Victoria J. Tschinkel, 60, Director since August 2002

•

Director of Phillips Petroleum Company from 1993 to 2002

•

Director of Florida Nature Conservancy from January 2003 to January 2007

•

Senior Environmental Consultant to Landers & Parsons, a Tallahassee, Florida law firm, from 1987 to 2002

•

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

•

Chairwoman of 1000 Friends of Florida

 

		Kathryn C. Turner, 60, Director since August 2002

•

Director of Phillips Petroleum Company from 1995 to 2002

•

Chairperson and Chief Executive Officer of Standard Technology, Inc., a management technology solutions firm she founded in 1985

•

Member of the Board of:

•

Carpenter Technology Corporation

•

Schering-Plough Corporation

		James E. Copeland, Jr., 63, Director since February 2004

•

Chief Executive Officer of Deloitte & Touche from 1999 to 2003

•

Senior Fellow for Corporate Governance with the U.S. Chamber of Commerce

•

Global Scholar with the Robinson School of Business at Georgia State University

•

Member of the Board of:

•

Coca-Cola Enterprises

•

Equifax Inc.

•

Time Warner Cable Inc.

 

		Kenneth M. Duberstein, 63, Director since August 2002

•

Director of Conoco Inc. from 2000 to 2002

•

Chairman and Chief Executive Officer of the Duberstein Group, a strategic planning and consulting company, since 1989

•

White House Chief of Staff (1988-1989) and Deputy Chief of Staff (1987) to President Ronald Reagan

•

Member of the Board of:

•

The Boeing Company

•

Mack-Cali Realty Corporation

•

The Travelers Companies, Inc.

 

		Ruth R. Harkin, 63, Director since August 2002

•

Director of Conoco Inc. from 1998 to 2002

•

Senior Vice President, International Affairs and Government Relations of United Technologies Corporation (UTC) and Chair of United Technologies International, UTC’s international representation arm from June 1997 to February 2005

•

Former President and Chief Executive Officer of the Overseas Private Investment Corporation from 1993 to 1997

•

Member of State of Iowa Board of Regents

•

Member of the Board of:

•

AbitibiBowater

 

		William E. Wade, Jr., 65, Director since March 2006

•

Director of Burlington Resources Inc. from 2001 to 2006

•

President of Atlantic Richfield Company from 1998 to 1999

•

Executive Vice President of Atlantic Richfield Company from 1993 to 1998

•

A series of management positions with Atlantic Richfield Company from 1968 to 1993

		Norman R. Augustine, 72, Director since August 2002

•

Director of Phillips Petroleum Company from 1989 to 2002

•

Director of Lockheed Martin Corporation from 1995 through March 2005

•

Chairman of the Board of Directors of Lockheed Martin Corporation from May 1996 through March 1998

•

Chief Executive Officer of Lockheed Martin Corporation from January 1996 through July 1997

•

Chief Executive Officer of Martin Marietta Corporation from December 1987 to March 1995

•

Member of the Board of:

•

The Black & Decker Corporation

•

The Procter & Gamble Company

 

		Charles C. Krulak, 66, Director since August 2002

•

Director of Conoco Inc. from 2000 to 2002

•

Executive Vice Chairman and Chief Administration Officer MBNA Corporation from March 2004 to June 2005

•

Chairman and Chief Executive Officer of MBNA Europe Bank Limited from January 2001 to March 2004

•

Senior Vice Chairman of MBNA America from September 1999 through January 2001

•

Commandant and Vice Commander of the United States Marine Corps and member of the Joint Chiefs of Staff from June 1995 to September 1999

•

Holds the Defense Distinguished Service Medal, the Silver Star Medal, the Bronze Star Medal with Combat “V” and two gold stars, the Purple Heart with gold star and the Meritorious Service Medal

•

Member of the Board of:

•

Freeport-McMoRan Copper & Gold Inc.

•

Union Pacific Corporation

 

		William R. Rhodes, 72, Director since August 2002

•

Director of Conoco Inc. from 1998 to 2002

•

Chairman, President and Chief Executive Officer of Citibank, N.A. since October 2005

•

Senior Vice Chairman of Citigroup Inc. since December 2001

•

Chairman of Citicorp/Citibank from February 2003 to October 2005

•

Senior Vice Chairman of Citicorp/Citibank from January 2002 to February 2003

•

Vice Chairman of Citigroup Inc. from March 1999 to December 2001

•

Vice Chairman of Citicorp/Citibank from July 1991 through December 2001

 

		J. Stapleton Roy, 72, Director since August 2002

•

Director of Phillips Petroleum Company from 2001 to 2002

•

Managing Director of Kissinger Associates Inc. since January 2001

•

Assistant Secretary of State for Intelligence and Research from 1999 to 2000

•

U.S. Ambassador to:

•

Singapore (from 1984 to 1986)

•

People’s Republic of China (from 1991 to 1995)

•

Indonesia (from 1996 to 1999)

•

Member of the Board of:

•

Freeport-McMoRan Copper & Gold Inc.

 Proposed Annual Election of Directors

(Proposal 2 on the Proxy Card)

 

Current Classification of the Company’s Board of Directors—Our Restated Certificate of Incorporation and Amended and Restated By-Laws currently provide that the directors’ terms of office are divided into three classes, with each class containing as nearly equal a number as possible. At each Annual Meeting only one class of directors is considered by the stockholders for election to a term of three years to succeed those directors whose terms expire at the meeting.

 

Description of Amendment Generally—The Board of Directors recommends stockholder approval of a proposal to amend our Restated Certificate of Incorporation and Amended and Restated By-Laws to eliminate the current classification of our directors. In the absence of such a classification, each of the directors would be elected and hold office until his or her successor is elected at the next Annual Meeting.

 

Background—The Committee on Directors’ Affairs and the full Board have considered the merits of the classified board structure, taking a variety of perspectives into account. While the Board believes that the classified board structure has promoted continuity and stability and reinforced a commitment to a long-term point of view, it also believes that the annual election of directors would increase the Board’s accountability to stockholders by providing stockholders with a means for evaluating each director each year.

 

Summary of Proposed Amendments—The following is a summary of the proposed amendments:

 

•

Declassification of the Board of Directors: Article FIFTH, Section A of our Certificate of Incorporation and Article III, Section 1 of our By-Laws would be amended and restated to eliminate classification of the Board of Directors and provide for annual election of the entire Board of Directors beginning at the 2009 Annual Meeting of Stockholders.

 

•

Removal of Directors Without Cause: Article FIFTH, Section B of our Certificate and Article III, Section 11 of our By-Laws would be amended and restated to provide for removal of a director without cause. Under Delaware law, stockholders may remove directors of companies with classified boards for cause. However, in Delaware companies without classified boards, directors may be removed with or without cause.

 

•

Filling of Director Vacancies by Stockholders: Article FIFTH, Section A of our Certificate and Article III, Section 2 of our By-Laws would be amended and restated to eliminate all references to the filling of vacancies in the Board of Directors by stockholders. Following these amendments, the Company’s governance documents would no longer make any explicit provision for the filling of vacancies in the Board of Directors by stockholders. As a result of these changes, the filling of vacancies in the Board of Directors by stockholders would be governed by the default provision under Delaware law that allows stockholders to replace directors in the event no directors remain in office.

 

These amendments are being voted on by our stockholders as a single proposal rather than as separate proposals because they are intertwined as a matter of law. Under Delaware law, corporations without a classified board may not limit the ability of stockholders to remove directors without cause. Thus, if the declassification amendment were to receive the requisite stockholder approval but a separate proposal to remove the limitation on stockholders to remove directors without cause did not, our charter would contain a provision that would be contrary to Delaware law. In addition, if our Board were to be declassified, we feel it would be essential to provide our stockholders with the power to fill vacancies on the Board in the event the entire board were not elected in its entirety, given the possibility under a regime of declassification coupled with majority voting that the entire Board is not elected at a subsequent annual meeting.

 

Text of Proposed Amendments—The proposed amendments are reflected in the marked copy of the proposed form of Restated Certificate of Incorporation attached to this proxy statement as Appendix A and the marked copy of the proposed form of Amended and Restated By-Laws attached to this proxy statement as Appendix B.

 

Effectiveness—If this proposal is approved by the stockholders, then our Board will be declassified, and all directors will be elected for a one-year term beginning at the 2009 Annual Meeting.

 

Vote Required—This proposal must be approved by the holders of 80% of the outstanding shares of our common stock.

 

THE BOARD RECOMMENDS

THAT YOU VOTE “FOR” THE

PROPOSAL

 Corporate Governance Matters and Communications with the Board

 

The Committee on Directors’ Affairs and our Board undertook a comprehensive review of the Company’s governance structure in light of the Sarbanes-Oxley Act of 2002 and rules adopted by the Securities and Exchange Commission (“SEC”) and the New York Stock Exchange (“NYSE”). The Board approved Corporate Governance Guidelines for the Company, which document many pre-existing policies and practices of the Company and also address issues responsive to the Sarbanes-Oxley Act and SEC and NYSE rules. The Corporate Governance Guidelines, posted on the Company’s Internet site under the “Corporate Governance” caption and available in print upon request (see “Available Information” on page 97), address the following matters, among others: director qualifications, director responsibilities, board committees, director access to officers, employees and independent advisors, director compensation, Board performance evaluations, director orientation and continuing education, and CEO evaluation and succession planning. The Corporate Governance Guidelines also contain director independence standards, which are consistent with the standards set forth in the NYSE listing standards, to assist the Board in determining the independence of the Company’s directors. The Board has determined that each director, except Mr. Mulva, meets the standards regarding independence set forth in the Corporate Governance Guidelines and is free of any material relationship with the Company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company). In making such determination regarding independence, the Board specifically considered the fact that many of our directors are directors, retired officers and stockholders of companies with which we conduct business. In addition, some of our directors serve as employees of, or consultants to, companies which do business with ConocoPhillips and its affiliates (as further described in “Related Party Transactions” on page 15). Finally, we recognize that some of our directors may purchase retail products (such as gasoline, fuel additives or lubricants) from the Company. In all cases, it was determined that the nature of the business conducted and the interest of the director by virtue of such position were immaterial both to the Company and to such director.

Finally, the Board considered the Charitable Gift Program (further described in “Non-Employee Director Compensation” on page 63) and, in part because the right to such benefit vests after one year of service, concluded that such program does not impair the independence of our directors.

 

Our Corporate Governance Guidelines provide that non-employee directors will meet in executive session at each meeting. The Chairman of the Committee on Directors’ Affairs presides at these meetings. Mr. Auchinleck is Chairman of the Committee on Directors’ Affairs and is responsible for setting the agenda for executive sessions of non-management directors and presiding at such meetings.

 

The Board of Directors maintains a process for stockholders and interested parties to communicate with the Board. Stockholders and interested parties may write or call our Board of Directors by contacting our Corporate Secretary, Janet Langford Kelly, as provided below:

 

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Mailing Address:

Corporate Secretary

ConocoPhillips

P.O. Box 4783

Houston, TX 77210-4783

 

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Phone Number:

(281) 293-3075

 

Communications addressed to individual Board members will be forwarded by the Corporate Secretary to the individual addressee. Any communications addressed to the Board of Directors will be forwarded by the Corporate Secretary to Mr. Auchinleck, Chairman of the Committee on Directors’ Affairs.

 

Recognizing that director attendance at the Company’s Annual Meeting can provide the Company’s stockholders with an opportunity to communicate with Board members about issues affecting the Company, the Company actively encourages its directors to attend the Annual Meeting of Stockholders. In 2007, all of the Company’s directors, either in person or by teleconference, attended the Annual Meeting.

 Code of Business Ethics and Conduct

 

ConocoPhillips has adopted a worldwide Code of Business Ethics and Conduct for Directors and Employees designed to help directors and employees resolve ethical issues in an increasingly complex global business environment. Our Code of Business Ethics and Conduct applies to all directors and employees, including the Chief Executive Officer and the Chief Financial Officer. Our Code of Business Ethics and Conduct covers topics including, but not limited to, conflicts of interest, insider trading, competition and fair dealing, discrimination and harassment, confidentiality, payments to government personnel, anti-boycott laws, U.S. embargos and sanctions, compliance procedures and employee complaint procedures. Our Code of Business Ethics and Conduct is posted on our Internet site under the “Corporate Governance” caption. Stockholders may also request printed copies of our Code of Business Ethics and Conduct by following the instructions located under the caption “Available Information” on page 97.

 

 Related Party Transactions

 

Our Code of Business Ethics and Conduct requires that all directors and executive officers promptly bring to the attention of the General Counsel and, in the case of directors, the Chairman of the Committee on Directors’ Affairs or, in the case of executive officers, the Chairman of the Audit and Finance Committee, any transaction or relationship that arises and of which she or he becomes aware that reasonably could be expected to constitute a related party transaction. Any such transactions are reviewed by the Company’s management and the appropriate Board Committee to ensure that they do not constitute a conflict of interest and are reported appropriately. Additionally, the Committee on Directors’ Affairs conducts an annual review of related party transactions between each of our directors and the Company (and its subsidiaries) and makes recommendations to the Board regarding the continued independence of each board member. In 2007, there were no related party transactions in which the Company was a participant and in which any director or executive officer (or their immediate family members) had a direct or indirect material interest. The Committee on Directors’ Affairs

specifically considered the following relationships in making its independence determination:

 

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Mr. McGraw is Chairman, President and Chief Executive Officer of The McGraw-Hill Companies. The McGraw-Hill Companies is a worldwide global information services provider in the financial services, education and business information markets through brands such as Standard & Poor’s, McGraw-Hill Education, BusinessWeek and J.D. Power and Associates. The Committee on Directors’ Affairs considered both the amount and nature of the transactions conducted with The McGraw-Hill Companies, as well as Mr. McGraw’s interest in such transactions and concluded he has no material direct or indirect interest in such transactions and that his independence has not been impaired by such ongoing relationships.

 

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Mr. Rhodes is Senior Vice Chairman of Citigroup Inc. and Chairman, President and Chief Executive Officer of Citibank, N.A., a subsidiary of Citigroup Inc. Citigroup provides a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management. Citigroup provides a range of investment banking, brokerage and commercial lending services to the Company in the ordinary course of business. The Committee on Directors’ Affairs considered both the amount and nature of the transactions conducted with Citigroup, as well as Mr. Rhodes’ interest in such transactions and concluded he has no material direct or indirect interest in such transactions and that his independence has not been impaired by such ongoing relationships.

 

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Mr. Copeland retired as Chief Executive Officer of Deloitte & Touche USA, and its parent company, Deloitte & Touche Tohmatsu in 2003. Since 2003, Mr. Copeland has been provided office space and administrative support from, and has provided consulting services to, Deloitte & Touche. Deloitte & Touche is a registered public accounting firm which has provided and continues to provide consulting services and tax advice to the Company. The Committee on Directors’ Affairs considered both the amount and nature of the transactions conducted with Deloitte & Touche, as well as Mr. Copeland’s interest in such transactions and concluded he has no material direct or indirect interest in such transactions and that his independence has not been impaired by such ongoing relationships.

 Nominating Processes of the Committee on Directors’ Affairs

 

The Committee on Directors’ Affairs (the “Committee”) comprises four non-employee directors, all of whom are independent under New York Stock Exchange (NYSE) listing standards and our Corporate Governance Guidelines. The Committee identifies, investigates and recommends to the Board director candidates with the goal of creating balance of knowledge, experience and diversity. Generally, the Committee identifies candidates through business and organizational contacts of the directors and management. Potential directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of the Company’s stockholders. In addition to reviewing a candidate’s background and accomplishments, the Committee reviews candidates for director nominees in the context of the current composition of the Board and the evolving needs of the Company’s businesses. The Committee also considers the number of boards on which the candidate already serves. It is the Board’s policy that at all times at least a substantial majority of its members meets the standards of independence promulgated by the NYSE and the SEC, and as set forth in the Company’s Corporate Governance Guidelines. The Committee also seeks to ensure that the Board reflects a range of talents, ages, skills, diversity, and expertise, particularly in the areas of accounting and finance, management, domestic and international markets, leadership, and oil and gas related industries, sufficient to provide sound and prudent guidance with respect to the Company’s operations and interests. The Board also requires that its members be able to dedicate the time and resources necessary to ensure the diligent performance of their duties on the Company’s behalf, including attending Board and applicable committee meetings. Each director is required to retire at the next annual stockholders’ meeting of the Company following his or her 72^nd birthday.

 

The Company’s By-Laws permit stockholders to nominate directors for election at a stockholders meeting whether or not such nominee is submitted to and evaluated by the Committee on Directors’ Affairs. To nominate a director using this process, the stockholder must follow procedures set forth in the Company’s By-Laws. Those procedures require a

stockholder to notify the Company’s Secretary of a proposed nominee not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders, or, in the case of a special meeting of stockholders, not less than 10 days nor more than 60 days prior to the date of such special meeting. The notice to the Secretary must include the following:

 

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The nominee’s name, age and business and residence addresses;

 

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The nominee’s principal occupation or employment;

 

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The class or series and number of shares of capital stock of the Company, which are owned beneficially or of record, by the nominee;

 

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The name and address of the nominating stockholder as they appear on the Company’s books;

 

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A description of all arrangements or understandings between the nominating stockholder and the nominee;

 

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The class and number of shares of Company stock owned by the nominating stockholder as of the record date for the annual meeting (if this date has been announced) and as of the date of the notice;

 

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A representation that the nominating stockholder intends to appear in person or by proxy at the meeting to nominate the candidate specified in the notice;

 

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A completed written questionnaire (in the form provided by the Corporate Secretary upon written request) with respect to the background and qualifications of the nominee and the background of any other person or entity on whose behalf the nomination is being made;

 

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A written representation and agreement (in the form provided by the Corporate Secretary upon written request) that the nominee:

 

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will abide by the requirements of Section 13 of Article II of our By-Laws;

 

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is not and will not become a party to (1) any agreement, arrangement or

 

understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the Company or (2) any Voting Commitment that could limit or interfere with such person’s ability to comply, if elected as a director, with such person’s fiduciary duties under applicable law;

 

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is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Company with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein, and

 

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in such nominee’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a director, and will comply with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Company; and

 

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Any other information regarding the nominee or stockholder that would be required to be included in a proxy statement relating to the election of directors.

 

The Committee will consider director candidates recommended by stockholders. If a stockholder wishes to recommend a director for nomination by the Committee, he or she should follow the same procedures set forth above for nominations to be made directly by the stockholder. In addition, the stockholder should provide such other information as it may deem relevant to the Committee’s evaluation. Candidates recommended by the Company’s stockholders are evaluated on the same basis as candidates recommended by the Company’s directors, CEO, other executive officers, third-party search firms or other sources.

 

Our By-Laws require directors to be elected by the majority of the votes cast with respect to such director in uncontested elections (i.e., the number of votes cast “for” a director must exceed the number of votes cast “against” that director). In a contested election (a situation in which the number of nominees exceeds the number of directors to be elected), the standard for election of directors will be a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors. If a nominee who is serving as a director is not elected at the annual meeting and no one else is elected in place of that director, then, under Delaware law, the director would continue to serve on the Board as a “holdover director.” However, under our By-Laws, the holdover director is required to tender his or her resignation to the Board. The Committee on Directors’ Affairs would then make a recommendation to the Board whether to accept or reject the tendered resignation, or whether some other action should be taken. The Board of Directors would then make a decision whether to accept the resignation taking into account the recommendation of the Committee on Directors’ Affairs. The Board is required to publicly disclose (by a press release, a filing with the SEC or other broadly disseminated means of communication) its decision regarding the resignation and the rationale behind the decision within 90 days from the date of the certification of the election results. The director who tenders his or her resignation will not participate in the Board’s decision. If a nominee who was not already serving as a director is not elected at the annual meeting, under Delaware law that nominee would not become a director and would not serve on the Board as a “holdover director.” In 2008, all nominees for the election of directors are currently serving on the Board.

 Role of the Compensation Committee

 

Authority and Responsibilities

 

The Compensation Committee of the Board of Directors of ConocoPhillips is responsible for providing independent, objective oversight for ConocoPhillips’ executive compensation programs and determining the compensation of anyone who meets our definition of a “Senior Officer.” Currently, our internal guidelines define a Senior Officer as an employee who is a senior vice president or higher, an executive who reports directly to the CEO, or any other employee considered an officer under Section 16(b) of the Securities Exchange Act of 1934. All of the Named Executive Officers in the compensation tables that follow are Senior Officers. In addition, the Compensation Committee acts as plan administrator of the compensation programs and benefit plans for Senior Officers and as an avenue of appeal for current and former Senior Officers regarding disputes over compensation and benefits.

 

One of the Compensation Committee’s responsibilities is to assist the Board in its oversight of the integrity of the Company’s “Compensation Discussion and Analysis” found starting on page 20 of this Proxy Statement. That report summarizes certain of the Compensation Committee’s activities during 2007 and 2008 concerning compensation earned during 2007.

 

A complete listing of the authority and responsibilities of the Compensation Committee is set forth in the written charter adopted by ConocoPhillips’ Board of Directors and last amended on December 11, 2006, which is available on our website www.conocophillips.com under the caption “Corporate Governance.”

 

Members

 

The Compensation Committee currently consists of five members. The members of the Compensation Committee and the member to be designated as Chair, like the members and Chairs of all of the Board’s committees, are reviewed and recommended annually by the Committee on Directors’ Affairs to the full Board. The Board of Directors has final approval of the committee structure of the Board. The only pre-existing requirements for service on the Compensation Committee are that members of the

Compensation Committee must meet the independence requirements for “non-employee” directors under the Securities Exchange Act of 1934, for “independent” directors under the NYSE listing standards, and for “outside” directors under the Internal Revenue Code.

 

Meetings

 

The Compensation Committee has regularly scheduled meetings in association with each regular Board meeting and meets telephonically between such meetings as necessary to properly discharge its duties. The Compensation Committee reserves time at each regularly scheduled meeting to review matters in executive session with no members of management or management representatives present except as specifically requested by the Compensation Committee. In 2007, the Compensation Committee had seven regularly scheduled meetings, and two other meetings. More information regarding the Committee’s activities at such meetings can be found in the “Compensation Discussion and Analysis” beginning on page 20.

 

Continuous Improvement

 

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

 

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Receives ongoing training regarding best practices for executive compensation;

 

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Regularly reviews its responsibilities and governance practices in light of ongoing changes in the legal and regulatory arena and trends in corporate governance, in which review it is aided by the Company’s management, compensation consultants, and, when deemed appropriate, independent legal counsel;

 

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

 

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Annually conducts a self-assessment of its performance that evaluates the effectiveness of the Committee’s actions and seeks ideas to improve its processes and oversight; and

 

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Regularly reviews and assesses whether the Company’s executive compensation programs are having the desired effects.

 Compensation Committee Report

 

Review with Management.    The Compensation Committee has reviewed and discussed with management the “Compensation Discussion and Analysis” presented in this proxy statement starting on page 20. Members of management with whom the Compensation Committee discussed the “Compensation Discussion and Analysis” included the Company’s Chief Executive Officer, Chief Financial Officer, and Vice President, Human Resources.

 

Discussions with Independent Executive Compensation Consultant.    The Compensation Committee has discussed with Towers Perrin, an independent executive compensation consulting firm, the executive compensation programs of the Company, as well as specific compensation decisions made by the Compensation Committee. Towers Perrin is retained directly by the Compensation Committee, independent of the management of the Company. The Compensation Committee has received written disclosures from Towers Perrin concerning other work performed for the Company by Towers Perrin, has discussed with Towers Perrin its independence from ConocoPhillips, and believes Towers Perrin to be independent of management.

 

Recommendation to the ConocoPhillips Board of Directors.    Based on its review and discussions noted above, the Compensation Committee recommended to the Board of Directors that the “Compensation Discussion and Analysis” be included in ConocoPhillips’ proxy statement on Schedule 14A (and, by reference, included in ConocoPhillips’ Annual Report on Form 10-K for the year ended December 31, 2007).

 

THE CONOCOPHILLIPS COMPENSATION COMMITTEE

 

William E. Wade, Jr., Chairman

Norman R. Augustine

Harold W. McGraw III

Harald J. Norvik

William R. Rhodes

 Compensation Discussion and Analysis

 

Our discussion and analysis of our executive compensation programs is arranged in three parts:

 

Ø	Compensation Objectives and Process (beginning on page 20) — This section provides a summary of the goals of our compensation program for executives and the structure in place to align our program with those goals.

 

Ø	Compensation Program Elements (beginning on page 25) — This section provides an overview of the programs we have in place to compensate our executives and an analysis of the function of each program in achieving the goals and objectives discussed in the first section.

 

Ø	Compensation Analysis (beginning on page 32) — This section provides an analysis of compensation decisions for 2007 and how such information relates to the amounts reported in the Executive Compensation Tables.

 

Compensation Objectives and Process

 

Executive Compensation Goals, Philosophy, and Principles

 

Our Goals:    Our goals are to attract, retain and motivate high-quality employees and maintain high standards of principled leadership so that we can responsibly deliver energy to the world and provide sustainable value for our stakeholders, now and in the future.

 

Our Philosophy:    We believe that our ability to responsibly deliver energy and to provide sustainable value is driven by superior individual performance. We believe that a company must offer competitive compensation to attract and retain experienced, talented and motivated employees. Moreover, we believe employees in a leadership role within the organization are motivated to perform at their highest levels by making performance-based pay a significant portion of their compensation.

 

Our Principles:    To achieve our goals, we implement our philosophy through the following guiding principles:

 

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Establish target compensation levels competitive with those of other companies with whom we compete for executive talent;

 

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Link pay to performance by making a substantial percentage of total executive compensation variable, or “at-risk,” through annual incentive compensation and the granting of long-term incentive awards, including stock options and performance-based restricted stock or performance-based restricted stock units;

 

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Allow executives to share in ConocoPhillips’ successes and failures by varying performance-based compensation from target levels based upon business performance;

 

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Motivate individual performance by considering the specific accomplishments of individual executives and the demonstration of leadership principles and ConocoPhillips’ values in determining individual compensation;

 

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Encourage talented individuals to stay with the company until retirement; and

 

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Integrate all elements of compensation into a comprehensive package that aligns goals, efforts, and results throughout the organization.

 

The Compensation Committee

 

As discussed under “Role of the Compensation Committee” on page 18, the Compensation Committee (the Committee) is charged with all compensation actions related to our Senior Officers, including all of our Named Executive Officers.

 

A complete listing of the authority and responsibilities of the Compensation Committee is set forth in its Charter, which can be found on our website at www.conocophillips.com under the caption “Corporate Governance.”

 

The Compensation Committee’s charter permits the Committee to delegate authority to subcommittees or other committees of the Board. In 2007, the Committee made no delegations of its authority over compensation matters relating to our Named Executive Officers.

External Advisors

 

The Compensation Committee is specifically authorized in its charter to retain external legal, accounting or other advisors and consultants at the Company’s expense. Since 2004, the Compensation Committee has retained Towers Perrin as its independent executive compensation consultant. In September 2005, the Committee adopted specific guidelines for outside compensation consultants retained to advise the Committee. The guidelines require (and Towers Perrin provides an annual attestation regarding compliance with such guidelines) that work done for the Company at management’s request be approved in advance by the Committee, require a review of the advisability of independent consultant rotation after a period of five years, and prohibit the Company from employing any individual who worked on the Company’s account for a period of one year after leaving the employ of the independent consultant. The Committee strongly discourages proposals to retain the independent consultants for any work other than advising the Committee and does not approve any work proposed by management for the Company that would compromise the independence of the consultants.

 

Since the adoption of the independence guidelines, the Committee has approved only two such requests. One request was to continue purchasing multi-company non-executive compensation surveys in the ordinary course of business at a nominal cost. The other request was to hire Towers Perrin, for a minimal sum, to assist on a one-time basis with a country-specific workforce planning project in 2005 because of their special expertise in related matters. In the view of the Committee, neither of these requests compromised the independence of Towers Perrin as a consultant to the Committee, and the Committee concurred with management’s assessment that Towers Perrin was better suited to provide the requested services than alternative providers.

 

Towers Perrin attends most regularly scheduled meetings of the Compensation Committee, as well as preparatory meetings with the Committee Chairman. Among other tasks assigned by the Committee, Towers Perrin typically:

 

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Prepares an annual presentation on the competitiveness of compensation to be paid to our CEO;

 

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Reviews the Committee’s proposed compensation decisions affecting our Named Executive Officers;

 

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Reviews presentations on executive compensation and benefits to be delivered to the Committee; and

 

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Advises the Committee of their opinions and conclusions regarding the presentations and issues before the Committee.

 

The Committee seeks counsel from Towers Perrin regarding whether the executive compensation programs, and the targets set under the programs for Named Executive Officers, are within the range of typical practice for the Company’s primary peers and that the total compensation actually paid to Named Executive Officers falls within the criteria established by the Committee. Towers Perrin also undertakes such other special projects as are assigned by the Committee. Additionally, Towers Perrin may attend executive sessions of the Committee as requested by the Committee.

 

Executive Support

 

The Committee is supported by the Vice President, Human Resources of the Company (“VPHR”), and such other executives and employees of the Company and consultants to the Company as the VPHR deems appropriate or the Compensation Committee requests. The Committee relies on the CEO and VPHR to implement its decisions.

 

The CEO and VPHR work with internal resources and the Company’s compensation consultant, Mercer Human Resource Consulting (“Mercer”), to design programs, implement Committee decisions, and recommend amendments to existing, or the adoption of new, compensation and benefits programs and plans applicable to Senior Officers (‘Senior Officer’ is defined in “Role of the Compensation Committee” on page 18) as well as to prepare necessary briefing materials for the Committee’s review as part of its decision-making process. Design and implementation of programs and plans for Senior Officers are generally reviewed with the Committee Chair, the Chief Executive Officer, the Chief Financial Officer, the VPHR, Mercer and Towers Perrin prior to being presented to the Committee.

The Committee annually reviews the Company’s compensation structure and programs; retirement, benefit and severance plans; and management succession plans. The Committee meets with the Committee on Directors’ Affairs each year to review the role of the CEO in the Company’s performance, his role in advancing the strategic objectives of the Company, and other factors relating to his individual performance during the year, as well as to establish performance objectives and compensation targets for the coming year.

 

The annual compensation process concludes at the Committee’s February meeting (the date of which is set at least a year in advance), when it evaluates the Company’s performance against criteria set for just-concluded performance periods, and determines the associated Corporate performance payout components, determines awards earned by Senior Officers under the Company’s short-term and long-term incentive programs for the concluded performance periods, and sets target compensation for Senior Officers for the upcoming year.

 

Before the Committee makes the foregoing determinations, the CEO provides his recommendations to the Compensation Committee on compensation actions for all Senior Officers, other than himself. The CEO and the Compensation Committee also discuss the CEO’s assessment of the performance of our Senior Officers and any other factors that the CEO believes the Compensation Committee should consider. The Compensation Committee reviews benchmarking data for similarly situated executives at other large, publicly-held energy companies (as well as large publicly-held non-energy companies, for staff executives) compiled by Mercer and reviewed by Towers Perrin.

 

With respect to our CEO, the Compensation Committee, with the input of Towers Perrin and Mercer, reviews and decides upon salary adjustments, incentive program payouts for the most recently concluded one and three-year performance periods and any awards under the stock option program. Likewise, the Compensation Committee also sets compensation targets for the upcoming one- and three-year performance periods based upon benchmarking studies for other CEOs within our primary peer group for benchmarking purposes.

 

Compensation Program Design

 

Our compensation programs for executives take into account marketplace compensation for executive talent, internal equity with our employees, past practices of the Company, corporate, business unit and individual results and the talents, skills and experience that each individual executive brings to ConocoPhillips.

 

The Compensation Committee begins by establishing target levels of total compensation for our Senior Officers for a given year. The targets take into account and reflect the considerations discussed in more detail below, including the use of peer benchmarking, internal pay equity and salary grade structure. Once an overall target compensation level is established, the Committee considers the weighting of each of our primary compensatory programs (Base Salary, Variable Cash Incentive Program, Stock Option Program and Performance Share Program) within the intended total target compensation.

 

Generally, our programs are designed to increase the proportion of performance-based or “at-risk” pay as a percentage of total compensation as an executive’s responsibilities increase. This is based upon the belief that our senior executives have more opportunity to affect the performance of the Company and that the executives’ performance will be enhanced by ensuring that a larger portion of their potential compensation is tied to the performance of the Company.

 

Salary Grade Structure

 

Each year, management, with the assistance of outside compensation consultants, undertakes a thorough examination of the scope and complexity of jobs throughout ConocoPhillips and a study of competitive compensation practices for such jobs. As a result of this work, management develops a compensation scale under which different positions are designated specific “grades.” Each grade has an associated base salary minimum, midpoint, and maximum and a target, which is expressed as a percentage of salary, for our annual bonus program. Eligible grades may also have an associated restricted stock unit and option target, also expressed as a percentage of salary. For our executives, the base salary midpoint increases at each increasing grade, but at a lesser rate than increases in target incentive compensation percentages. The result is an increased

percentage of “at risk” compensation as the executive’s grade is increased. Modifications to our salary grade structure to reflect marketplace trends are reviewed annually and, with respect to our Senior Officers, approved by the Compensation Committee. The Compensation Committee also approves any salary grade changes for our Senior Officers, including our Named Executive Officers.

 

Benchmarking

 

In setting target compensation, we, with assistance from Mercer, refer to multiple relevant compensation surveys that include but are not limited to large energy companies. We then compare that information to the base salary ranges and incentive compensation targets by salary grade to determine any necessary changes so that the cumulative target, which includes base salary and all incentive compensation, for each salary grade is broadly at the 50th percentile for similar positions as indicated by the survey data.

 

An individual analysis is then conducted for our Named Executive Officers in which we seek to obtain compensation data for our primary peer group, as well as other relevant groups, such as companies within the Fortune 50 Index, for benchmarking purposes specific to the position. For example, we focus on large, publicly-held energy companies as the proper primary peer group for benchmarking purposes in determining targets for our CEO, while we often include broader measures, such as other publicly-held energy companies for our operating executives, as well as other large publicly-held non-energy companies for staff executives. The conclusions are reviewed and independently confirmed by the Compensation Committee’s independent compensation consultant, Towers Perrin. The Compensation Committee uses the results of these surveys as a factor in setting compensation structure and targets relating to our Named Executive Officers.

 

The Compensation Committee’s use of primary peer groups in the context of our compensation programs generally falls into two broad categories: setting compensation targets and measuring Company performance.

 

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Setting Compensation Targets

 

As discussed above, before setting individual compensation targets under each of our primary compensation programs, the Compensation

Committee establishes target levels of total compensation for our Senior Officers each year. This includes a review of targets for ongoing performance periods. Once total compensation targets are established, the Committee sets targets for future performance periods within each program. In setting total compensation targets and targets within each individual program, the Compensation Committee uses the following primary peer group for benchmarking purposes—ExxonMobil Corporation, Royal Dutch Shell plc, BP p.l.c., and Chevron Corporation.

 

The Committee also utilizes a secondary group of peer companies for benchmarking the compensation of our Named Executive Officers—Valero Energy Corporation, Marathon Oil Corporation, Sunoco, Inc., Hess Corporation, Occidental Petroleum Corporation, and, for staff executives, other large publicly-held non-energy companies.

 

We utilize the primary peer group in setting compensation targets because these companies are broadly reflective of the industry in which we compete for business opportunities, as well as executive talent, and because they provide a good indicator of the current range of compensation for executives.

 

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Measuring Performance

 

In assessing our actual performance for a given performance period under our performance-based programs, we use ExxonMobil, Royal Dutch Shell, BP, Total S.A., and Chevron as our primary peer group for performance measurement because we believe our performance is best measured against the largest publicly-held, international, integrated oil and gas companies against which we compete in our business operations.

 

Developing Performance Measures

 

We have attempted to develop performance metrics that assess the performance of the Company relative to its primary peer group rather than absolute performance. This is based on the belief that absolute performance can be affected positively or negatively by industry-wide factors over which our executives

have no control, such as prices for crude oil and natural gas. We have also attempted to isolate the underlying performance necessary to enable achievement of those goals considering our unique circumstances within the industry. We have selected multiple metrics, as described below, because we believe no one metric is sufficient to capture the performance we are seeking to drive, and any metric in isolation is unlikely to promote the well-rounded executive performance necessary to enable us to achieve long-term success. We recognize, however, that no metric or set of metrics can reliably measure actual performance in light of unanticipated opportunities and challenges. We reassess the performance metrics periodically to respond to these changing circumstances.

 

Internal Pay Equity

 

We believe our salary grade structure provides a framework for an equitable compensation ratio between executives, with higher targets for jobs at salary grades having greater duties and responsibilities. Taken as a whole, our compensation program is designed so that the individual target level rises as salary grade level increases, with the portion of performance-based compensation rising as a percentage of total targeted compensation. One result of this structure is that actual total compensation of an executive as a multiple of the total compensation of his or her subordinates is designed to increase in periods of above-target performance and decrease in times of below-target performance.

 

Alignment of Interests

 

We place a premium on aligning the interests of executives with those of our stockholders. Our Stock Ownership Guidelines require executives to own stock valued at a multiple of base salary, ranging from 1.8 times salary, for lower-level executives, to 6 times salary, for the CEO. The multiple of equity held by each of our Named Executive Officers exceeds our established guidelines for their positions. Employees have five years from the date they become subject to the Guidelines to comply with the Guidelines.

 

We have historically required our executives to hold restricted stock units received under the Performance Share Program, and in predecessor programs, until death, disability, retirement, layoff, or severance after

a change in control. The units are generally forfeited if an executive voluntarily leaves the Company’s employ when not retirement eligible. We are informed by both Mercer and Towers Perrin that this is a highly unusual feature. We have employed the holding period to align our executives’ interests with those of our stockholders for the duration of their career with the Company and to encourage executives to stay with the Company. A result is that our Named Executive Officers do not vest in a substantial part of their compensation for the duration of their employment by the Company. Thus, amounts shown under “Stock Awards” in the “Outstanding Equity Awards at Fiscal Year End” table beginning on page 47 reflect accumulated restricted stock and restricted stock units from each Named Executive Officer’s entire tenure as an executive and, therefore, are higher than they would be for a comparably compensated executive at another company whose performance incentives vested after a period of a few years, which we are advised is more typical. In light of this fact, the Compensation Committee has considered our programs and determined, for performance periods beginning in 2009, it will allow our Senior Officers to elect to have restrictions lapse on restricted stock unit awards five years from the anniversary of the grant date. The Compensation Committee believes this change in future periods will ensure our executives’ maintain their focus on long-term performance, while also allowing the Company’s programs to be more competitive with those of our peers.

 

Statutory and Regulatory Considerations

 

In designing our compensatory programs, we consider and take into account the various tax, accounting and disclosure rules associated with various forms of compensation. The Compensation Committee also reviews and considers the deductibility of executive compensation under section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1 million that is paid to certain individuals. The Company generally will be entitled to take tax deductions relating to compensation that is performance-based or that will not be paid until the executive leaves the Company, which may include cash incentives, stock options, restricted stock, restricted stock units and other performance-based awards. The Compensation Committee seeks to preserve tax deductions for

executive compensation to the extent consistent with the Committee’s determination of compensation arrangements necessary and appropriate to foster achievement of our business goals. However, the Compensation Committee has also awarded compensation that might not be fully tax deductible when it believes such grants are nonetheless in the best interests of our stockholders.

 

On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, changing the tax rules applicable to nonqualified deferred compensation arrangements. The Company designs its compensation programs to be in compliance with these statutory provisions. A more detailed discussion of the Company’s nonqualified deferred compensation arrangements is provided on page 55 under the heading “Nonqualified Deferred Compensation.”

 

Compensation Policies

 

ConocoPhillips is a global, integrated energy company with operations and employees worldwide and, as such, we must respond to local conditions, practices, and laws in our compensation programs. Therefore, no compensation arrangements are applicable to all of our salaried employees. However, since our Named Executive Officers are each United States-based salaried employees, we do not discuss benefit programs that are generally applicable to all United States-based salaried employees.

 

The Compensation Committee carefully considers aspects of shorter-term performance that will drive the long-term sustainable performance we seek, as well as the best measures of that performance. Where appropriate, performance criteria have been established relative to the performance of other energy companies rather than on an absolute basis. Although the Committee sets performance measures for performance-based programs, compensation under those programs is not mandated by attainment of specified performance levels. Rather, all employees are informed of the performance measures that will be used to evaluate their performance for a given period, such as relative annual total stockholder return, but also understand that no given performance under those measures will entitle them to any guaranteed resulting payments under these programs. The Compensation Committee gives great weight to the Company’s performance on these measures

relative to our primary peer group for performance measurement. However, the Compensation Committee also retains discretion to consider other factors as the Committee seeks to determine the Company’s or business unit’s relative performance within the industry and the contribution of the individual to that performance. The Compensation Committee believes that the stockholders’ interests are best served by having the Committee retain discretion to implement the compensation philosophy described earlier.

 

Option Pricing

 

When the Committee grants options to its Named Executive Officers, the Company uses an average of the high and low of stock prices on the date of grant (or the preceding business day, if the markets are closed on the date of grant) to determine the exercise price of the options. Grants of options are generally made at the Compensation Committee’s February meeting (the date of which is determined at least a year in advance) or, in the case of new hires, on the date of commencement of employment or the date of Compensation Committee approval, whichever is later.

 

Employment Agreements

 

Our Named Executive Officers each serve without an employment agreement. All compensation for these officers is set by the Committee as described above.

 

Compensation Program Elements

 

Our executive compensation program has four primary components which are intended, collectively, to compensate and create incentives for our executives with respect to past, current and future performance. These four primary components are:

 

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Base Salary;

 

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Variable Cash Incentive Program;

 

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Stock Option Program; and

 

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Performance Share Program.

 

In addition to these primary components, the Company also provides its executives with retirement, severance, health and other personal benefits as described below.

Base Salary

 

Base salary is a major component of the compensation for all of our salaried employees, although it becomes a smaller component of total targeted compensation as an employee rises through the ConocoPhillips salary grade structure. Base salary is important, especially at lower salary grades, to give an individual financial stability for personal planning purposes. There are also motivational and reward aspects to base salary, as base salary can be increased or decreased from target to account for considerations such as individual performance and time in position.

 

Performance-Based Pay — Measures and Criteria

 

Performance Measures — We use corporate, business unit and individual performance criteria in determining individual payouts.

 

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Corporate Performance Criteria — At the beginning of each performance period, the Compensation Committee establishes, in consultation with management, performance criteria for the Company. At the conclusion of a performance period, the Compensation Committee makes a subjective evaluation of the performance of the Company against the pre-established criteria for such program. We utilize multiple measures of performance under our programs to ensure that no single aspect of performance is driven in isolation. We have employed the following measures of overall Company performance under our performance-based programs:

 

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Relative Total Stockholder Return — Total stockholder return represents the percentage change in a company’s common stock price from the beginning of a period of time to the end of the stated period, and assumes common stock dividends paid during the stated period are reinvested into that common stock. We use a total stockholder return measure because it is the most tangible measure of the value we have provided to our stockholders during the relevant program period. We recognize that total stockholder return is not a perfect measure. It can be affected by factors beyond management’s control and by market conditions not related to the intrinsic performance of the Company. It

can also be driven in the short term to the detriment of long-term performance. We seek to mitigate the influence of industry-wide conditions on stock price by using total stockholder return relative to our primary peer group.

 

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Relative Adjusted Return on Capital Employed — Relative return on capital employed is a measure of the profitability of our capital employed in our integrated business compared with that of our peers. We calculate return on capital employed as a ratio, the numerator of which is income from continuing operations plus after-tax interest expense and minority interests, and the denominator of which is average common stockholders’ equity plus total debt and minority interests. Our businesses are capital intensive, requiring large investments, in most cases over a number of years, before tangible financial returns are achieved. Therefore, we believe that a good indicator of long-term Company and management performance, both absolute and relative to our primary peer group, is the measure known as return on capital employed (ROCE). The use of ROCE as a comparative measure is complicated by the fact that two different accounting methods were used for business combinations prior to June 2001. Accounting for a combination on the “purchase” method generally resulted in a much higher amount of capital employed after the combination than did the “pooling-of-interests” method. While we were required to utilize the “purchase” method for all of our significant business combinations, several members of our primary peer group for performance measurement utilized the “pooling-of-interests” method for their significant combinations. Historically, in comparing our ROCE to our primary peer group for performance measurement, where necessary so that these amounts will be comparable, we adjusted the “capital employed” to reflect our estimate of significant business combinations using the “pooling” method of accounting, as well as for certain non-core earnings impacts. In 2007, the Compensation Committee

 

approved a change in the way Adjusted ROCE is calculated under our performance-based programs. As a result, in measuring performance for 2007 and future years we no longer adjust our “capital employed” to reflect our estimate of “pooling” for significant business combinations. However, we do adjust the “capital employed” of our primary peer group for performance measurement to reflect our estimate of significant business combinations using the “purchase” method of accounting, and we continue to adjust the Company and peers for certain non-core earnings impacts. For performance periods beginning before 2005, our programs considered our improvement on Adjusted ROCE relative to our primary peer group for performance measurement. For performance periods beginning in 2005 through 2007, our programs considered our absolute Adjusted ROCE relative to our primary peer group for performance measurement during the program performance period.

 

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Relative Adjusted Income per Barrel of Oil Equivalent (BOE) — An important measure of operating efficiency and management performance is a comparison of the income earned by the Company per barrel of oil produced by our Exploration & Production business segment, or E&P, and per barrel of petroleum products sold by our Refining & Marketing business segment, or R&M. This measure allows us to compare our operating efficiency in producing and refining/marketing products against that of our primary peer group. The measure is calculated by dividing adjusted income attributable to our E&P and R&M segments by the number of barrels produced or petroleum products sold, respectively. A weighted average of these two segment-level metrics is then calculated, and compared against that of our peers. As with our calculation of Adjusted ROCE, we adjust both our own income and that of our peers to reflect certain non-core earnings impacts. We added this metric for performance periods beginning in 2007.

 

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Health, Safety and Environmental Performance — We seek to be a good employer, a good community member and a good steward of the environmental resources we manage. Therefore, we have historically incorporated metrics of health, safety and environmental performance in our annual incentive bonus program.

 

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Implementation of Strategic Plan — This measure is a subjective analysis of the Company’s progress in implementing its strategic plan over a given performance period. We added this metric for performance periods beginning in 2007.

 

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Business Unit Performance Criteria — There are over 100 discrete award units within the Company designed to measure performance and to reward employees according to business outcomes relevant to the award group. Although most employees participate in a single award unit designated for the operational or functional group to which such employee is assigned, a Senior Officer can participate in a blend of the results of more than one of these award units depending on the scope and breadth of his or her responsibilities over the performance period. Moreover, because our CEO is responsible for overall Company performance, his award is based solely on individual and overall Company performance.

 

At the beginning of each performance period, management establishes award units and the performance criteria for each award unit. Performance criteria are goals consistent with the Company’s operating plan and include quantitative and qualitative metrics specific to each business unit, such as income from continuing operations (adjusted to neutralize the impact of changes in commodity prices, which may be either favorable or unfavorable), control of costs, value added indices, and various milestones set by management. At the conclusion of a performance period, management makes a subjective determination of the unit’s performance for the year, which determination includes a subjective evaluation of performance versus the pre-established criteria for such award unit. The Compensation Committee approves or adjusts the recommendation from management regarding the performance of each award unit.

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Individual Performance Criteria — Individual adjustments for Senior Officers, including our Named Executive Officers, are approved by the Compensation Committee, based on the recommendation of the CEO (other than for himself). The CEO’s individual adjustment is determined by the Compensation Committee taking into account the prior review of his performance conducted jointly by the Compensation Committee and the Committee on Directors’ Affairs.

 

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Tax-Based Program Criteria — Our annual incentive program is also designed to conform to the requirements of section 162(m) of the Internal Revenue Code, which allows for deductible compensation in excess of $1 million if certain criteria, including the attainment of pre-established performance criteria, are met.

 

Performance-Based Pay Programs

 

Annual Incentive (Bonus) — The Variable Cash Incentive Program (VCIP) is a broadly-available annual incentive program for our employees throughout the world, and it is our primary vehicle for recognizing Company, business unit, and individual performance for the past year. We believe that having an “at risk” element for all of our employees gives them a financial stake in the achievement of our business objectives on an annual basis and therefore motivates them to use their best efforts to ensure the achievement of those objectives. We believe that one year is a valuable measurement period that should be included in a compensation program because we measure and report our business accomplishments annually, as do our primary peers and other public companies, and our valuation is derived, in part, from comparisons of such annual results with the results of our primary peers and relative to prior annual periods. We also believe that one year is a time period over which all employees who participate in the program can have the opportunity to establish and achieve their specified goals. The award is weighted equally for Company and Business Unit performance for named executive officers other than the CEO, and solely on Company performance for the CEO.

 

Long-Term Incentives — Our primary long-term incentive compensation programs for executives are the Stock Option and Stock Appreciation Rights

Program (Stock Option Program) and the Performance Share Program (PSP) which, along with VCIP, are each programs under our stockholder approved 2004 Omnibus Stock and Performance Incentive Plan (2004 Omnibus Plan). These programs evaluate and reward performance over longer periods than our annual incentive programs. The Stock Option Program provides annual grants of stock options to our executives, the amount of which is based on their salary, their salary grade level, and their performance during the preceding year. The PSP measures performance over three-year periods and, since the settlement of the award is made in restricted stock units which may not be transferred while an executive remains employed by the Company, has the effect of encouraging executives to stay with the Company and of aligning the interests of the executive with those of the stockholders for the balance of the executive’s career with the Company.

 

The combination of the Stock Option Program, the PSP, and the extended holding periods associated with the restricted stock units received under the PSP combine to provide a comprehensive package of medium and long-term compensation incentives for our executives that align their interests with those of our long-term stockholders. Such extended holding periods also enable the Company to more readily withdraw awards should circumstances arise that merit such action. To date, no Named Executive Officers have been subject to reductions or withdrawals of prior grants or payouts of restricted stock, restricted stock units or stock option awards. Circumstances meriting such withdrawal are determined at the discretion of the Compensation Committee, but could potentially include a material restatement or change in reported financial results for past periods for reasons other than the adoption of new accounting standards, or indicators of malfeasance by an executive, although there have been no such instances at ConocoPhillips.

 

As discussed in “Benchmarking — Setting Compensation Targets” on page 23, targets under our long-term incentive programs are based on a guideline value for restricted stock units and stock options as a percent of salary established for each salary grade level of management. Targets generally provide approximately 50 percent of the long-term incentive award in the form of stock options and 50 percent in the form of restricted stock units awarded under the PSP. In years prior to 2005, stock options

were more heavily-weighted relative to restricted stock and restricted stock units, but changes were made to reflect, in part, ongoing trends in compensation at large companies, including the Company’s primary peers, accounting changes related to stock option grants, and recognition that both restricted stock units and stock options are useful compensatory devices for rewarding past individual performance, encouraging long-term corporate performance, and aligning the interests of the recipients with those of our stockholders. The Company began using restricted stock units rather than restricted stock in 2004 primarily in response to changes in U.S. tax laws that affected both the Company and its employees. However, these units are expected to be settled in Company stock when restrictions lapse.

 

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Stock Option Program — The Stock Option Program is designed to maximize medium- and long-term stockholder value. It is the practice under this program to set option exercise prices at not less than 100 percent of the fair market value of the Company’s stock at the time of the grant. For this purpose, the Company uses an average of the high and low of stock prices on the date of grant (or the preceding business day, if the markets are closed on the date of grant). Grants are generally made at the Compensation Committee’s February meeting (the date of which is determined at least a year in advance) or, in the case of new hires, on the date of commencement of employment or the date of Compensation Committee approval, whichever is later. Although the Committee retains discretion to adjust stock option awards up or down by up to 30 percent from the specified target, the Committee did not elect to exercise such discretion with respect to the Stock Option Awards granted in February 2007. Since the value of an option is derived solely from an increase in the Company’s stock price, the value of a stockholder’s investment in the Company must appreciate before an option holder receives any financial benefit from the option. We understand that stock options have been criticized for giving executives incentives to increase the price of the stock in the short term to the detriment of the long term. We believe these incentives are countered by the one-third annual vesting schedule for stock options combined with the impact of the PSP’s requirement to hold restricted stock units for an extended period of time. Likewise, our Stock

Option Program provides a valuable “completely at-risk” complement to the PSP.

 

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Performance Share Program (PSP) — The PSP rewards executives based on their individual performance and the performance of the Company over a three-year period. Beginning in 2003, each year the Committee has established a three-year performance period over which it compares the performance of the Company with that of its primary peer group for performance measurement under pre-established criteria for such period. Thus, in any given year, performance is being measured for purposes of three overlapping performance periods. Use of a multi-year performance period helps to focus management on longer-term results, but it can also provide compensation that may seem anomalous if compared only to performance in the current year (which may be better or worse relative to the multi-year period).

 

A guideline value determines the PSP targets for each PSP participant and is expressed in a number of restricted stock units, set at the beginning of the performance period. The guideline value takes into account a discount due to the estimated foregone dividend payments during the performance period for the targeted award (prior to issuance of the actual award).

 

Each executive’s individual award is subject to a performance adjustment at the end of the performance period. Although the Compensation Committee maintains final discretion to adjust compensation in accordance with any unique circumstances that may arise, and has done so in the past, program guidelines generally result in an award range between 0 to 200 percent of target. Final awards are based on the Committee’s subjective evaluation of the Company’s performance relative to the established metrics noted above and of each executive’s individual performance and long-term potential, considering input from the CEO for each participant other than himself. Targets for participants whose salary grades are changed during a performance period are prorated for the period of time such participant remained in each relevant salary grade.

 

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Other Possible Awards — ConocoPhillips may make awards outside the Stock Option Program or

 

the PSP (off-cycle awards). Off-cycle awards are awards granted outside the context of our regular compensation programs (these awards are also commonly referred to as “ad hoc” or “special purpose” awards). Currently, off-cycle awards are granted to certain incoming executive personnel, typically on the first day of employment, (1) to induce an executive to join the Company (occasionally replacing compensation that will be lost to the executive because of termination from the prior employer); (2) to induce an executive of an acquired company to remain with the Company long enough for the executive to be evaluated in the ConocoPhillips environment; and/or (3) to provide a pro-rata equity award to an executive joining the Company during an ongoing performance period under a plan for which he or she is ineligible because he or she joined the Company during the middle of the performance period. In the past, off-cycle awards have also been used as rewards for successful projects and, in such cases, the Compensation Committee has proposed a shorter period for restrictions on transfer associated with restricted stock units issued under the Performance Share Program which the Committee believes is consistent with the purpose of the award. While it retains discretion to do so, the Compensation Committee has indicated to our management that it does not expect to make off-cycle awards in connection with specific projects in the future. No off-cycle awards were made to any of our Named Executive Officers in 2007.

 

Pursuant to the Compensation Committee’s charter, any off-cycle awards to Senior Officers must be approved by the Compensation Committee.

 

Broadly-Available Plans

 

Our Named Executive Officers participate in the same basic benefits package as our other U.S. salaried employees. This includes a basic benefits package consisting of retirement, medical, dental, vision, life insurance and accident insurance plans, as well as flexible spending arrangements for health care and dependent care expenses.

 

Perquisites and Personal Benefits

 

We provide our Named Executive Officers with a limited number of perquisites. These are designed

primarily to minimize the amount of time they devote to administrative matters other than Company business, promote a healthy work/life balance, provide opportunities for developing business relationships, and put a human face on our social responsibility programs. However, with respect to our executive life insurance coverage and our defined contribution and defined benefit plans, our primary goal is to provide a competitive package of compensation and benefits. All such programs are approved by the Compensation Committee.

 

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Financial Planning — We reimburse our Named Executive Officers for their costs associated with financial planning up to certain limits. We do this to facilitate tax preparation and the creation of a sound personal investment strategy for our executives.

 

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Comprehensive Security Program — Our Board of Directors has adopted a comprehensive security program for our executives in recognition that our executives face personal safety risks in their roles as representatives of a global, integrated energy company. Under this program, our Manager of Global Security monitors changing developments in risk and threat analysis and security systems and services and recommends to management appropriate security measures. Other than in the case of a serious and immediate risk of harm, changes to the program are approved by our Board of Directors. In the Summary Compensation Table in the “All Other Compensation” column, we have reflected certain costs associated with this program, such as personal use of Company aircraft, the use of Company automobiles, and home security expenses. Although the Company does not believe that these services are compensatory in nature, we are required to classify them as personal benefits.

 

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Personal Entertainment — We purchase tickets to various cultural, charitable, civic, entertainment and sporting events for business development and relationship-building purposes, as well as to maintain our involvement in communities in which the Company operates. Occasionally, our employees, including our executives, make personal use of tickets that would not otherwise be used for business purposes. We believe these tickets offer an opportunity to significantly increase morale at a very low or no incremental cost to the Company.

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Tax Gross-Ups — Certain of the perquisites and personal benefits received by our executives are deemed to be taxable income to the individual by the Internal Revenue Service. When we believe that such income is incurred for purposes more properly characterized as Company business than personal benefit, we provide further payments to the executive to reimburse the cost of the inclusion of such item in the executive’s taxable income. Most often, these tax gross-up payments are provided for travel by a family member or other personal guest of an executive to attend a meeting or function in furtherance of Company business, such as Board meetings, Company-sponsored events, and industry and association meetings where spouses or other guests are invited or expected to attend.

 

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Matching Gift Program — Each of our executives is eligible for our charitable matching gift program. This program provides a dollar-for-dollar match of a gift of cash or securities, up to a maximum of $15,000 per executive (or $7,500 for retired executives) during any one calendar year. We provide this program to support personal charitable giving by our executives because we believe such support encourages executive involvement in community activities which furthers our mission of being a good community citizen and because we believe our Company image is enhanced by the personal involvement of our executives in charitable activities.

 

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Executive Life Insurance — We maintain life insurance policies and/or death benefits for all of our U.S. based salaried employees (at no cost to the employee) with a face value approximately equal to their annual salaries. For our executives, we maintain an additional life insurance policy and/or death benefits (at no cost to the executive) with a value equal to their annual salary. These two programs combine to provide an executive with life insurance equal to two times annual salary at no cost to the executive (other than imputed income for tax purposes, which we do not gross up). In addition to these two plans, we also provide our executives the option of purchasing group variable universal life insurance in an amount up to five times their annual salary. We believe this is a benefit valued by our executives that can be provided at no cost to the Company.

 

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Defined Contribution Plans — We maintain the following nonqualified defined contribution plans for our executives. These plans allow deferred amounts to grow tax-free until distributed, and also allow the Company to utilize the money for the duration of the deferral period for general corporate purposes.

 

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Voluntary Deferred Compensation Plans — The purpose of our voluntary nonqualified deferred compensation plans is to allow executives to defer a portion of their salary and bonus. By making such deferrals, the executive defers paying taxes on such amounts until the year in which distributions are made from the plans. While in these plans, the executives are allowed to direct the investment of deferred amounts held on their behalf.

 

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Make-Up Plans —The purpose of our nonqualified defined contribution make-up plans is to provide benefits that an executive would not otherwise be entitled to receive due to limitations imposed by the Internal Revenue Code.

 

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Defined Benefit Plans — We also maintain nonqualified defined benefit plans for our executives. The primary purpose of these plans is to provide benefits that an executive would not otherwise be entitled to receive due to limitations imposed by the Internal Revenue Code.

 

Severance Plans and Changes in Control

 

We maintain plans to address severance of our executives in certain circumstances as described under the heading “Executive Severance and Changes in Control” beginning on page 57. The use and structure of these plans is competitive within the industry and is intended to aid the Company in attracting and retaining executives.

 

The Executive Severance Plan was approved by the Compensation Committee and provides benefits to executives in salary grades corresponding to vice president (or equivalent) and higher in the event that the Company discharges the executive without cause. This plan was adopted to provide the Company with flexibility to make personnel changes at the executive level when executives impacted by such changes

would not be entitled to the layoff benefits provided in the broad-based severance plan for employees. We believe this plan aids us in recruiting executives externally when necessary as it provides new hires a measure of protection, and it enables us to avoid negotiating individual severance arrangements with newly hired executives or departing executives. We also believe this plan reduces the likelihood and extent of litigation from executive severance.

 

The Compensation Committee also approved a Change in Control Severance Plan to provide similar benefits in the event of a discharge of covered executives after a change in control of the Company. The Change in Control Severance Plan provides benefits to executives in salary grades corresponding to vice president (or equivalent) and higher in the event that the Company discharges the executive without cause following a change in control. In our view, the severance level provided under the plan is appropriate as it is the current standard for senior executives in many U.S. industries. The Change in Control Severance Plan also incorporates a provision to deal with the impact of the federal excise tax on excess parachute payments. The so-called “golden parachute” tax rules subject “excess parachute payments” to a dual penalty: the imposition of a 20 percent excise tax upon the recipient and non-deductibility of such payments by the paying corporation. While the excise tax is seemingly evenhanded, the excise tax can discriminate against long-serving employees in favor of new hires, against individuals who do not exercise stock options in favor of those who do and against those who elect to defer compensation in favor of those who do not. For these reasons, we believe that the provision of the excise tax gross-up in the Change in Control Severance Plan is appropriate.

 

Compensation Analysis

 

In determining performance-based compensation awards for our Named Executive Officers for performance periods concluding in 2007, the Compensation Committee began by considering overall Company performance, including the following accomplishments and operating conditions:

 

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Strong financial performance relative to peers, ranking 1st in three- and five-year total stockholder return and 2nd in one-year total stockholder return;

 

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Reserve replacement of 186 percent for the three years ending December 31, 2007, including the impact of the Burlington Resources acquisition, our additional equity investment in LUKOIL, the EnCana business venture, and the expropriation of our Venezuelan oil assets;

 

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Strong financial performance in 2007, with net income of $11.9 billion, or $7.22 per diluted share, including the effects of an impairment of $4.5 billion related to the expropriation of the Company’s oil assets in Venezuela;

 

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Improved health, safety and environmental operational performance;

 

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Advancement of strategic initiatives, including formation and development of the EnCana business ventures; and

 

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Execution of financial strategies, including share repurchases of $7 billion and debt reduction of $5.4 billion resulting in a reduction in the debt-to-capital ratio to 19 percent at the end of 2007 from 24 percent at the end of 2006.

 

The Committee then considered any adjustments to the awards under our three performance-based compensation programs (VCIP, Stock Option Program and PSP) in accordance with their terms and pre-established criteria, while retaining the discretion to adjust awards based solely on the Committee’s determination of appropriate payouts.

 

As a result, the Committee made the following award decisions under the Company’s performance-based compensation programs.

 

2007 VCIP Awards

 

In determining award payouts under VCIP for 2007, the Compensation Committee considered the following performance criteria:

 

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Company Performance for 2007 — In 2007, our VCIP program used both quantitative and qualitative performance measures relating to the Company as a whole, including:

 

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Ranking 2nd in annual total stockholder return compared with our primary peer group for

 

performance measurement (ExxonMobil, Royal Dutch Shell, BP, Total, and Chevron);

 

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Ranking 4th in annual adjusted return on capital employed compared with the same primary peer group for performance measurement noted above;

 

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Ranking 4th in income per BOE compared with the same primary peer group for performance measurement noted above; and

 

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The Compensation Committee also reviewed our health, safety and environmental performance.

 

Based on such review, the Committee determined that the Company’s performance under these measures in 2007 merited payment of 140% of the targeted amount.

 

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Business Unit Performance in 2007 — In determining award unit performance, the Committee used quantitative and qualitative performance measures relating to separate business units, including, but not limited to:

 

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Quantitative metrics specific to each business unit, such as income from continuing operations (adjusted to neutralize the impact of changes in commodity prices, which may be either favorable or unfavorable), control of costs, value added indices, and various milestones set by management;

 

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Health, safety and environmental performance within each business unit;

 

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Success in developing and implementing strategic plans;

 

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Contribution to the growth and success of ConocoPhillips;

 

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Leadership in the industry and community; and

 

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Social and ethical responsibility.

 

Mr. Lowe participated in all award units within the E&P segment, Mr. Gallogly participated in all award

units within the R&M segment, and Mr. Berry participated in the award units within the E&P segment over which he had responsibility. The Committee determined that the performance of the applicable award units merited awards of 113.5% of target for Mr. Lowe, 117.3% of target for Mr. Gallogly, and 107.6% of target for Mr. Berry. Messrs. Carrig, Cornelius and Gates, participated in staff award units over which they have, or had, responsibility and the Committee determined that performance of these award units merited awards of 109.3%, 106.0%, and 109.3% of target, respectively. As noted under “Business Unit Performance Criteria” beginning on page 27, because our CEO is responsible for overall Company performance, his award is based solely on individual and overall Company performance.

 

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Individual Performance Adjustments — Finally, the Committee considered individual adjustments for each Named Executive Officer’s 2007 VCIP award based upon a subjective review of the individual’s impact on the Company’s financial and operational success during the year. The Committee considered the totality of the executive’s performance and long-term potential, and the performance and long-term potential of the management team as a whole in deciding the individual adjustments. In this regard, the Committee believed that the strength of the management team merited substantially similar individual adjustments. There was no single material factor of individual performance that resulted in the individual adjustments. Based on the foregoing and in the sole discretion and judgment of the Compensation Committee, the Committee approved, at its February 2008 meeting, individual performance adjustments of 30% for Mr. Mulva, 25% for Mr. Carrig and 20% for each of Messrs. Gallogly, Lowe and Cornelius. No individual adjustments were approved for Messrs. Berry or Gates, who announced their retirements in 2007.

 

Stock Option Awards

 

Although the Committee retains discretion to adjust stock option awards up or down by up to 30 percent from the specified target, the Committee did not elect to exercise such discretion with respect to the Stock Option Awards granted in February 2007.

PSP Awards (2005-2007)

 

In February 2005, the Compensation Committee established the third performance period under the PSP, for the three-year period beginning January 1, 2005, and ending December 31, 2007 (PSP III). In determining awards under the PSP for this period, the Committee considered quantitative and qualitative performance measures relating to the Company as a whole, including:

 

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Ranking 1st in relative total stockholder return compared with our primary peer group for performance measurement (ExxonMobil, Chevron, Royal Dutch Shell, BP, and Total);

 

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Ranking 2nd in relative adjusted return on capital employed compared with the same primary peer group for performance measurement; and

 

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Each executive’s individual performance and long-term potential.

 

Based on such review, the Committee determined that the Company’s performance under the stated criteria during the three-year performance period merited payment of 175% of the targeted amount. With respect to individual adjustments, similar to the 2007 VCIP program, the Committee considered PSP individual adjustments for each Named Executive Officer in recognition of the individual’s contribution to the Company’s financial and operational success over the three-year performance period. The Committee considered the totality of the executive’s performance and long-term potential, and the performance and long-term potential of the management team as a whole in deciding the individual adjustments. In this regard, the Committee believed that the strength of the management team merited substantially similar individual adjustments. There was no single material factor of individual performance that resulted in the individual adjustments. Based on the foregoing and in the sole discretion and judgment of the Compensation Committee, the Committee approved, at its February 2008 meeting, individual performance adjustments of 14% for each of our Named Executive Officers (other than Messrs. Berry and Gates, who announced their retirements in 2007 and who each received awards of 100% of targeted amounts for the performance period).

 

Supplement to Summary Compensation Table

 

The Executive Compensation Tables beginning on page 39, together with the accompanying narrative disclosures and notes, provide information concerning the total compensation of our Named Executive Officers. However, further explanation is necessary to transparently show how the programs, processes and decisions described within this “Compensation Discussion and Analysis” are reflected in the Executive Compensation Tables. As we discussed in “Compensation Objectives & Process – Compensation Program Designs” beginning on page 22, the Compensation Committee sets targets under each of our four primary compensation programs for our Named Executive Officers. Following the close of the relevant performance periods, Company, business unit and individual performance are considered and actual awards are adjusted as appropriate in light of such performance.

 

The amounts considered by the Committee for annual or program-specific awards both in setting targets and making awards are not necessarily reflected in the amounts shown under the “Stock Awards” and “Option Awards” columns of the Summary Compensation Table on page 39. This difference occurs primarily because the “Stock Awards” and “Option Awards” columns in the Summary Compensation Table do not reflect solely the values of awards made for a particular year while the amounts considered by the Committee reflect solely the values of awards made for a particular year or program.

 

The Summary Compensation Table columns include the Financial Accounting Standards Board Statement No. 123(R), “Share-Based Payment” (FAS 123(R)) expense recognized by the Company in the year for all outstanding stock and option awards, which, because of the current “hold-until-retirement” feature of our restricted stock/restricted stock unit programs, can be a substantial amount. Because we currently require our executives to hold restricted stock and restricted stock unit awards for an extended holding period (until retirement for program periods commencing prior to 2009 or, for program periods ending after 2010, the earlier of retirement and at least 5 years following completion of the program period), any appreciation in our stock price during a given year results in the Company recognizing the

value of such appreciation with respect to certain previously-earned awards in its financial statements, and therefore, in the Summary Compensation Table. The Compensation Committee does not consider the effect of stock price appreciation or depreciation on prior performance-vested awards in making target or award decisions. The Compensation Committee recognizes that the extended holding periods may result in larger amounts being reflected in the Summary Compensation Table than would be the case for awards that fully-vested at the conclusion of the performance period. In the case of such awards, a change in stock price would have no effect on values reported in the Summary Compensation Table. However, the Committee believes our programs best align the interests of executives with those of our stockholders over the long-term.

 

Other factors we are required to take into account in determining the FAS 123(R) value that is reported in the Summary Compensation Table do not necessarily affect Compensation Committee decisions. The Committee does not consider the age or proximity to retirement of an individual executive in making target or award decisions. However, FAS 123(R)

requires that an executive’s age and proximity to retirement eligibility be considered in determining the financial statement impact of his or her stock based awards. As a result, for FAS 123(R) and Summary Compensation Table purposes, an individual who is retirement-eligible will, generally speaking, have a larger amount recognized as compensation expense for the same award than will an executive who is not retirement-eligible.

 

Finally, changes in accounting rules or our interpretation of the application of those rules to our programs may affect the FAS 123(R) value of all or some outstanding awards in the year in which the change in rule or interpretation occurs, resulting in an increase or decrease in the amount reported in the “Stock Awards” and/or “Options Awards” columns of the Summary Compensation Table. However, in making target and award decisions, the Committee considers the value of the awards then being considered under then-prevailing rules and interpretations, and does not consider changes in the value of previously-granted awards resulting from rule or interpretation changes.