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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

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x	Definitive Proxy Statement

 

¨	Definitive Additional Materials

 

¨	Soliciting Material Pursuant to §240.14a-12

 

 

ALCOA INC.

 

(Name of Registrant as Specified In Its Charter)

 

 

 

  

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

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¨	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

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Notice of 2015 annual Meeting of Shareholders and Proxy Statement

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March 19, 2015

Dear Alcoa Shareholders:

 

I cordially invite you to attend the 2015 Annual Meeting of Shareholders of Alcoa Inc. to be held on Friday, May 1, 2015, at 9:30 a.m., Eastern Daylight Time, at the Fairmont Hotel, 510 Market Street, Pittsburgh, Pennsylvania 15222.   At the meeting, shareholders will vote on the matters set forth in the accompanying Notice of Annual Meeting and Proxy Statement. We will also review the Company’s major developments of 2014 and answer your questions about Alcoa’s business and operations.   Your vote is very important. Whether or not you will attend the meeting, we hope that your shares are represented and voted. In advance of the meeting on May 1, please cast your vote through the Internet, by telephone or by mail. Instructions on how to vote are found in the section entitled “Proxy Summary—How to Cast Your Vote” on page 3.

This year’s proxy statement demonstrates our ongoing commitment to provide a clear and detailed discussion of matters that will be addressed at the meeting. We have included a proxy summary starting on page 3 that provides highlights of the detailed information included elsewhere in the proxy statement. The Compensation Discussion and Analysis, which begins on page 40, provides a focused discussion of our executive compensation practices that reinforce pay-for-performance and shareholder alignment.

Thank you for being a shareholder of Alcoa. We look forward to seeing you at the meeting.

Sincerely,

 

Klaus Kleinfeld

Chairman of the Board and Chief Executive Officer

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NOTICE OF 2015 ANNUAL MEETING OF SHAREHOLDERS			1
PROXY STATEMENT			2
Proxy Summary			3
Item 1 Election of Directors			7
Nominees to Serve for a Three-Year Term Expiring in 2018			8
Directors Whose Terms Expire in 2016			10
Directors Whose Terms Expire in 2017			12
Nominating Board Candidates – Procedures and Director Qualifications			14
Director Compensation			16
Director Fees			16
Directors’ Alignment with Shareholders			17
2014 Director Compensation			18
Corporate Governance			20
The Structure and Role of the Board of Directors			21
Board Leadership Structure			21
The Board’s Role in Risk Oversight			22
Director Qualifications, Board Diversity and Board Tenure			23
Board Meetings and Attendance			24
Board, Committee and Director Evaluations			24
Committees of the Board			24
Majority Voting for Directors			26
Communications with Directors			26
Director Independence			27
Related Person Transactions			27
Compensation Committee Interlocks and Insider Participation			28
Compensation Consultants			28
Business Conduct Policies and Code of Ethics			29
Corporate Governance Materials Available on Alcoa’s Website			29
Recovery of Incentive Compensation			29
Other Matters			30
Section 16(a) Beneficial Ownership Reporting Compliance			32
Alcoa Stock Ownership			32
Stock Ownership of Certain Beneficial Owners			32
Stock Ownership of Directors and Executive Officers			33
Item 2 Ratification of Appointment of Independent Registered Public Accounting Firm			35
Report of the Audit Committee			36
Audit and Non-Audit Fees			37

 

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Item  3 Advisory Approval of Executive Compensation			38
Compensation Committee Report			39
Executive Compensation			40
Compensation Discussion and Analysis			40
Executive Summary			40
Compensation Design and Philosophy			42
Analysis of 2014 Compensation Decisions			53
2014 Annual Cash Incentive Compensation			55
2014 Equity Awards: Stock Options and Performance-Based Restricted Share Units			56
Other Compensation Policies and Practices			57
2014 Summary Compensation Table			61
2014 Grants of Plan-Based Awards			64
2014 Outstanding Equity Awards at Fiscal Year-End			65
2014 Option Exercises and Stock Vested			66
2014 Pension Benefits			66
2014 Nonqualified Deferred Compensation			67
Potential Payments Upon Termination or Change in Control			68
Questions and Answers About the Meeting and Voting			71
Attachments
Attachment A — Pre-Approval Policies and Procedures for Audit and Non-Audit Services			75
Attachment B — Peer Group Companies for Market Information for 2014 Executive Compensation Decisions			77
Attachment C — Calculation of Financial Measures			78

 

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Notice of 2015 Annual Meeting of Shareholders

 

 

Friday, May 1, 2015 9:30 a.m. Eastern Daylight Time		Fairmont Hotel 510 Market Street Pittsburgh, PA 15222

 

 

The Annual Meeting of Shareholders of Alcoa Inc. (“Alcoa” or the “Company”) will be held on Friday, May 1, 2015 at 9:30 a.m., local time, at the Fairmont Hotel, 510 Market Street, Pittsburgh, PA 15222. Shareholders of record of Alcoa common stock at the close of business on February 20, 2015 are entitled to vote at the meeting.

The purposes of the meeting are:

 

1.	to elect the four directors identified in the accompanying proxy statement to serve three-year terms expiring at the 2018 annual meeting of shareholders;

2.	to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2015;

3.	to approve, on an advisory basis, executive compensation; and

4.	to transact such other business as may properly come before the meeting or any adjournment or postponement thereof.

You will need an admission ticket if you plan to attend the meeting. Please see the questions and answers section of the proxy statement for instructions on how to obtain an admission ticket.

We will provide a live webcast of the meeting from our website at http://www.alcoa.com under “About—Corporate Governance—Annual Meeting.”

On behalf of Alcoa’s Board of Directors,

 

Audrey Strauss

Executive Vice President, Chief Legal Officer and Secretary

March 19, 2015

 

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390 Park Avenue

New York, NY 10022-4608

 

 

 

		Proxy Statement

 

 

 

		Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders To Be Held on May 1, 2015   The Company’s Notice of 2015 Annual Meeting of Shareholders and Proxy Statement and 2014 Annual Report are available at www.ReadMaterial.com/AA.
		The Board of Directors of Alcoa Inc. (“Alcoa” or the “Company”) is providing this proxy statement in connection with Alcoa’s 2015 Annual Meeting of Shareholders to be held on Friday, May 1, 2015, at 9:30 a.m., local time, at the Fairmont Hotel, 510 Market Street, Pittsburgh, PA 15222, and at any adjournment or postponement thereof.   Proxy materials or a Notice of Internet Availability of Proxy Materials (the “Notice”) are being first released to shareholders on or about March 19, 2015. In accordance with rules and regulations adopted by the Securities and Exchange Commission (the “SEC”), instead of mailing a printed copy of the Company’s proxy materials to each shareholder of record, the Company may furnish proxy materials by providing access to those documents on the Internet. The Notice contains instructions on how to access our proxy materials and vote online, or in the alternative, request a paper copy of the proxy materials and a proxy card. Shareholders who do not receive the Notice will continue to receive either a paper or an electronic copy of our proxy materials.

 

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2015 PROXY STATEMENT

Proxy Summary

We provide below highlights of certain information in this Proxy Statement. As it is only a summary, please refer to the complete Proxy Statement and Alcoa’s 2014 Annual Report before you vote.
2015 Annual Meeting of Shareholders
Time and Date:		9:30 a.m., Eastern Daylight Time, May 1, 2015
Place:		Fairmont Hotel, 510 Market Street, Pittsburgh, Pennsylvania 15222
Record Date:		February 20, 2015
Webcast:		We will provide a live webcast of the annual meeting from our website at http://www.alcoa.com under “About—Corporate Governance—Annual Meeting.”
Voting:		Shareholders as of the record date are entitled to vote. Each share of common stock is entitled to one vote for each director nominee and one vote for each of the other proposals to be voted on.
Admission:		An admission ticket is required to enter Alcoa’s annual meeting. Please see Question 5 on page 72 regarding how to obtain a ticket.

 

 

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2015 PROXY STATEMENT

Proxy Summary (continued)

 

 

 

 

		Voting Matters and Board Recommendations
		Voting Matters				Board’s   Recommendation		Page Reference     (for more detail)
		Item 1.		Election of Four Director Nominees to Serve for a Three-Year Term Expiring in 2018		ü  FOR Each     Nominee		7
		Item 2.		Ratification of Appointment of PricewaterhouseCoopers LLP as the Company’s Independent Registered Public Accounting Firm for 2015		ü  FOR		35
		Item 3.		Advisory Vote to Approve Executive Compensation		ü FOR		38

 

 

Board Nominees (page 8) Alcoa’s Board of Directors currently has 13 members divided into three classes. Directors are elected for three-year terms. The following table provides summary information about each director nominee standing for re-election to the Board for a three-year term expiring in 2018.

Name

Age

Director  Since

Professional Background

Independent

Committee Memberships

Other Public Company Boards

Kathryn S. Fuller

68

2002

Chair, Smithsonian’s National Museum of Natural History; Former President and Chief Executive Officer, World Wildlife Fund

Yes

Compensation and Benefits; Public Issues

—

L. Rafael Reif

64

2015

President of the Massachusetts Institute of Technology

Yes

—

Schlumberger Limited

Patricia F. Russo

62

2008

Former Chief Executive Officer, Alcatel-Lucent

Yes

Compensation and Benefits (Chair); Executive; Governance and Nominating

General Motors Company; Hewlett-Packard Company; KKR Management LLC; Merck & Co., Inc.

Ernesto Zedillo

63

2002

Director of the Yale Center for the Study of Globalization; Former President of Mexico

Yes

Audit; Public Issues  (Chair)

Citigroup Inc.; Promotora de Informaciones, S.A.; The Procter & Gamble Company

 

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2015 PROXY STATEMENT

Proxy Summary (continued)

 

 

 

 

Corporate Governance Highlights (page 20)   The Company is committed to good corporate governance, which we believe is important to the success of our business and in advancing shareholder interests. Our corporate governance practices are described in greater detail in the “Corporate Governance” section. Highlights include: •      majority voting for directors •     12 out of 13 Board members are independent •      independent Lead Director with substantial responsibilities •     diversity reflected in Board composition •      regular executive sessions of independent directors •     average Board attendance of 94% during 2014 •      independent Audit, Compensation and Benefits, Governance and Nominating, and Public Issues Committees •     risk oversight by full Board and committees •      regular Board, committee and director nominee self-evaluations •     active shareholder engagement •      shareholder right to call special meetings •     shareholders’ ability to take action by written consent •      long-standing commitment toward sustainability •     policies prohibiting short sales, hedging, margin accounts and pledging

 

Financial and Operating Highlights																2014 Sales: $23.9 Billion
		($ in millions, except per share amounts)		2014				2013
		Sales		$	23,906			$	23,032
		Net income (loss)		$	268			$	(2,285	)
		After-tax operating income:
		Alumina		$	370			$	259
		Primary Metals		$	594			$	(20	)
		Global Rolled Products		$	312			$	252
		Engineered Products and Solutions		$	767			$	726
		Per common share data:
		Basic		$	0.21			$	(2.14	)
		Diluted		$	0.21			$	(2.14	)
		Dividends paid		$	0.12			$	0.12
		Total assets		$	37,399			$	35,742
		Capital expenditures		$	1,219			$	1,193
		Cash provided from operations		$	1,674			$	1,578
		Book value per share*		$	9.07			$	9.84
		Common stock outstanding, end of year			1,216,663,661				1,071,011,162
*    Book value per share = (total shareholders’ equity minus preferred stock) divided by common stock outstanding, end of year

 

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2015 PROXY STATEMENT

Proxy Summary (continued)

 

 

 

Executive Compensation Highlights (page 40)   The Compensation Discussion and Analysis provides a focused discussion of how Alcoa’s executive compensation philosophy drove strong operating and financial performance in 2014. •      Alcoa’s compensation philosophy and investor outreach guided the 2014 executive compensation plan. •       Alcoa’s priority for equity pay-for-performance has produced value for shareholders. •      Alcoa made significant progress in executing its transformation strategy and delivered exceptional operational and financial performance in 2014. •      Alcoa set short- and long-term business plan targets that, in turn, formed the basis for its incentive compensation and long-term incentive targets. •       Alcoa chose 2014 metrics that correlate to shareholder value and incentive compensation and long-term incentive targets that drove exceptional performance. •       The Compensation and Benefits Committee made incentive compensation and long-term incentive awards that reflected the strong performance of 2014 and that are intended to reward and retain exceptional talent who delivered that performance.

		WHAT WE DO						WHAT WE DON’T DO
		ü    We pay for performance   ü    We consider peer groups in establishing compensation   ü    We review tally sheets   ü    We have robust stock ownership guidelines   ü    We schedule and price stock option grants to promote transparency and consistency   ü    We have clawback policies incorporated into our incentive plans   ü    We have double-trigger equity vesting in the event of a change-in-control   ü    We pay reasonable salaries to our senior executives   ü    We provide appropriate benefits to our senior executives   ü    We have a conservative compensation risk profile   ü    We consider tax deductibility when designing and administering our incentive compensation   ü    The Compensation and Benefits Committee retains an independent compensation consultant						û    We do not pay dividend equivalents on stock options and unvested restricted share units   û    We do not allow share recycling   û    We do not allow repricing of underwater stock options (including cash-outs)   û    We do not allow hedging or pledging of Company stock   û    We do not have excise tax gross-ups for new participants in our Change in Control Severance Plan   û    We do not enter into multi-year employment contracts   û    We do not provide significant perquisites

 

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2015 PROXY STATEMENT

 

Item 1 Election of Directors

 

As of the date of this proxy statement, Alcoa’s Board of Directors has 13 members divided into three classes. Directors are elected for three-year terms. The terms for each class end in successive years.

The Board of Directors, upon the recommendation of the Governance and Nominating Committee, has nominated four incumbent directors, Kathryn S. Fuller, L. Rafael Reif, Patricia F. Russo, and Ernesto Zedillo, to stand for re-election to the Board for a three-year term expiring in 2018. Ms. Gueron, whose term expires at the annual shareholders meeting on May 1, 2015, will not be standing for re-election. In accordance with the directors’ retirement policy in the Company’s Corporate Governance Guidelines, Ms. Gueron has announced her intention to retire from the Board effective May 1, 2015 as she would reach age 75 during a new three-year term. See “The Structure and Role of the Board of Directors—Board Leadership Structure” for more information regarding Ms. Gueron’s pending retirement.

Each of the director nominees was elected by the shareholders at the 2012 Annual Meeting of Shareholders except L. Rafael Reif, who was appointed by the Board of Directors, upon the recommendation of the Governance and Nominating Committee, effective March 2, 2015. Mr. Reif was recommended to the Governance and Nominating Committee as a director candidate by the other members of the Board.

The Board of Directors has affirmatively determined that each of the four nominees qualifies for election under the criteria for evaluation of directors (see “Minimum Qualifications for Director Nominees and Board Member Attributes” on page 14 and “Board, Committee and Director Evaluations” on page 24). Included in each nominee’s biography below is a description of the qualifications, experience, attributes and skills of such nominee. In addition, the Board of Directors has determined that each nominee qualifies as an independent director under New York Stock Exchange corporate governance listing standards and the Company’s Director Independence Standards. See “Director Independence” on page 27.

If a nominee is unable to serve as a director, the Board may reduce its size or choose a substitute.

 

The Board of Directors recommends a vote “FOR” ITEM 1, the election of each of Kathryn S. Fuller, L. Rafael Reif, Patricia F. Russo, and Ernesto Zedillo to the Board for a three-year term expiring in 2018.

 

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2015 PROXY STATEMENT

Item 1 Election of Directors (continued)

 

 

Nominees to Serve for a Three-Year Term Expiring in 2018

 

 

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2015 PROXY STATEMENT

Item 1 Election of Directors (continued)

 

 

 

Nominees to Serve for a Three-Year Term Expiring in 2018

 

 

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2015 PROXY STATEMENT

Item 1 Election of Directors (continued)

 

 

 

Directors Whose Terms Expire in 2016

 

 

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2015 PROXY STATEMENT

Item 1 Election of Directors (continued)

 

 

 

Directors Whose Terms Expire in 2016

 

 

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2015 PROXY STATEMENT

Item 1 Election of Directors (continued)

 

 

 

Directors Whose Terms Expire in 2017

 

 

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2015 PROXY STATEMENT

Item 1 Election of Directors (continued)

 

 

 

Directors Whose Terms Expire in 2017

 

 

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2015 PROXY STATEMENT

 

Item 1 Election of Directors (continued)

 

 

Nominating Board Candidates – Procedures and Director Qualifications

Shareholder Recommendations for Director Nominees

 

Any shareholder wishing to recommend a candidate for director should submit the recommendation in writing to our principal executive offices: Alcoa Inc., Governance and Nominating Committee, c/o Corporate Secretary’s Office, 390 Park Avenue, New York, NY 10022-4608. The written submission should comply with all requirements set forth in the Company’s Articles of Incorporation and By-Laws. The committee will consider all candidates recommended by shareholders who comply with the foregoing procedures and satisfy the minimum qualifications for director nominees and Board member attributes.

Shareholder Nominations from the Floor of the Annual Meeting

 

The Company’s Articles of Incorporation provide that any shareholder entitled to vote at an annual shareholders’ meeting may nominate one or more director candidates for election at that annual meeting by following certain prescribed procedures. Not later than 90 days before the anniversary date of the immediately preceding annual meeting, the shareholder must provide to Alcoa’s Corporate Secretary written notice of the shareholder’s intent to make such a nomination or nominations. The notice must contain all of the information required in the Company’s Articles of Incorporation and By-Laws.

Any such notice must be sent to our principal executive offices: Alcoa Inc., Corporate Secretary’s Office, 390 Park Avenue, New York, NY 10022-4608. The deadline for receipt of any shareholder nominations for the 2016 annual meeting is February 1, 2016.

Minimum Qualifications for Director Nominees and Board Member Attributes

 

The Governance and Nominating Committee has adopted Criteria for Identification, Evaluation and Selection of Directors:

 

1.	Directors must have demonstrated the highest ethical behavior and must be committed to the Company’s values.

2.

Directors must be committed to seeking and balancing the legitimate long-term interests of all of the Company’s shareholders, as well as its other stakeholders, including its customers, employees and the communities where the Company has an impact. Directors must not be beholden primarily to any special interest group or constituency.

3.	It is the objective of the Board that all non-management directors be independent. In addition, no director should have, or appear to have, a conflict of interest that would impair that director’s ability to make decisions consistently in a fair and balanced manner.

4.

Directors must be independent in thought and judgment. They must each have the ability to speak out on difficult subjects; to ask tough questions and demand accurate, honest answers; to constructively challenge management; and at the same time, act as an effective member of the team, engendering by his or her attitude an atmosphere of collegiality and trust.

5.	Each director must have demonstrated excellence in his or her area and must be able to deal effectively with crises and to provide advice and counsel to the Chief Executive Officer and his or her peers.

6.

Directors should have proven business acumen, serving or having served as a chief executive officer, chief operating officer or chief financial officer of a significant, complex organization, or other senior leadership role in a significant, complex organization; or serving or having served in a significant policy-making or leadership position in a well respected, nationally or internationally recognized educational institution, not-for-profit organization or governmental entity; or having achieved a widely recognized position of leadership in the director’s field of endeavor, which adds substantial value to the oversight of material issues related to the Company’s business.

7.	Directors must be committed to understanding the Company and its industry; to regularly preparing for, attending and actively participating in meetings of the Board and its committees; and to ensuring that existing

 

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2015 PROXY STATEMENT

Item 1 Election of Directors (continued)

 

 

 

and future individual commitments will not materially interfere with the director’s obligations to the Company. The number of other board memberships, in light of the demands of a director nominee’s principal occupation, should be considered, as well as travel demands for meeting attendance.

8.

Directors must understand the legal responsibilities of board service and fiduciary obligations. All members of the Board should be financially literate and have a sound understanding of business strategy, business environment, corporate governance and board operations. At least one member of the Board must satisfy the requirements of an “audit committee financial expert.”

9.	Directors must be self-confident and willing and able to assume leadership and collaborative roles as needed. They need to demonstrate maturity, valuing board and team performance over individual performance and respect for others and their views.

10.	New director nominees should be able to and committed to serve as a member of the Board for an extended period of time.

11.

While the diversity, the variety of experiences and viewpoints represented on the Board should always be considered, a director nominee should not be chosen nor excluded solely or largely because of race, color, gender, national origin or sexual orientation or identity. In selecting a director nominee, the committee will focus on any special skills, expertise or background that would complement the existing Board, recognizing that the Company’s businesses and operations are diverse and global in nature.

12.	Directors should have reputations, both personal and professional, consistent with the Company’s image and reputation.

Process of Evaluation of Director Candidates

 

The Governance and Nominating Committee makes a preliminary review of a prospective candidate’s background, career experience and qualifications based on available information or information provided by an independent search firm which identifies or provides an assessment of a candidate. If a consensus is reached by the committee that a particular candidate would likely contribute positively to the Board’s mix of skills and experiences, and a Board vacancy exists or is likely to occur, the candidate is contacted to confirm his or her interest and willingness to serve. The committee conducts interviews and may invite other Board members or senior Alcoa executives to interview the candidate to assess the candidate’s overall qualifications. The committee considers the candidate against the criteria it has adopted in the context of the current composition and needs of the Board and its committees.

At the conclusion of this process, the committee reaches a conclusion and reports the results of its review to the full Board. The report includes a recommendation whether the candidate should be nominated for election to the Board. This procedure is the same for all candidates, including director candidates identified by shareholders.

The Governance and Nominating Committee has retained the services of a search firm that specializes in identifying and evaluating director candidates. Services provided by the search firm include identifying potential director candidates meeting criteria established by the committee, verifying information about the prospective candidate’s credentials, and obtaining a preliminary indication of interest and willingness to serve as a Board member.

 

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2015 PROXY STATEMENT

 

Director Compensation

Our non-employee director compensation program is designed to attract and retain outstanding director candidates who have the requisite experience and background as set forth in our Corporate Governance Guidelines, and to recognize the substantial time and effort necessary to exercise oversight of a complex global organization like Alcoa and fulfill the other responsibilities required of our directors. Mr. Kleinfeld, our sole employee director, does not receive additional compensation for his Board service.

The Governance and Nominating Committee reviews director compensation periodically and recommends changes to the Board when it deems appropriate. In late 2014, the committee engaged an independent compensation consultant, Pearl Meyer & Partners, LLC, to conduct an independent review of our director compensation program. Pearl Meyer & Partners assessed the structure of our director compensation program compared to competitive market practices of similarly situated companies. Based on the market information and recommendations provided to the committee by Pearl Meyer & Partners, and taking into account various factors, including the responsibilities of the directors generally, the responsibilities of the Lead Director and committee chairs, and Company performance, the committee recommended to the Board, and the full Board approved, a new compensation program for non-employee directors, effective January 1, 2015.

Information regarding the retention of Pearl Meyer & Partners can be found under “Corporate Governance—Compensation Consultants” beginning on page 28.

Director Fees

The table below describes the components of compensation for non-employee directors in effect during 2014 and the new compensation program effective January 1, 2015:

 

Annual Compensation Element		2014 Compensation Program		2015 Compensation Program
Retainer for Non-Employee Directors		$230,000 comprising 50% in cash and 50% to be deferred into Alcoa share units or invested in Alcoa stock until a director meets the stock ownership requirement of $400,000		$240,000 comprising 50% in cash (“Cash Component”) and 50% to be invested in Alcoa deferred share units or in Alcoa stock until a director meets the stock ownership requirement of $750,000 (equivalent to 6.25x the Cash Component)
Lead Director Fee		$  11,000		$  25,000
Audit Committee Chair Fee (includes Audit Committee Member Fee)		$  27,500		$  27,500
Audit Committee Member Fee		$  11,000		$  11,000
Compensation and Benefits Committee Chair Fee		$  20,000		$  20,000
Governance and Nominating Committee Chair Fee		$  16,500		$  16,500
Public Issues Committee Chair Fee		$  16,500		$  16,500
Meeting Fees		None		None
Stock Ownership Requirement		$400,000		$750,000

 

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2015 PROXY STATEMENT

Director Compensation (continued)

 

 

 

Directors’ Alignment with Shareholders

Stock Ownership Guideline for Directors

In order to further align the interests of directors with the long-term interests of our shareholders, non-employee directors are required to own, until retirement from the Board, at least $750,000 (this amount was increased from $400,000 effective January 1, 2015) in Alcoa common stock. Compliance with the ownership value requirement is measured annually and if the stock price declines in value, directors must continue to invest in Alcoa stock until the stock ownership guideline is reached. To satisfy this requirement, directors must either invest in Alcoa deferred share units under the Company’s 2005 Deferred Fee Plan for Directors or purchase shares in the open market. Deferred share units issued to directors provide directors with the same economic interest as if they own Alcoa common stock. Specifically, the deferred share units track the performance of our common stock and accrue dividend equivalents that are equal in value to dividends paid on our common stock. Upon a director’s retirement from the Board, the deferred share units are settled at a value equivalent to the then-prevailing market value of our common stock. Accordingly, whether a director holds shares of Alcoa common stock or deferred share units, directors have the same economic interest in the performance of the Company, which further aligns directors’ interests with those of our shareholders.

The following table shows the value of each non-employee director’s holdings in Alcoa common stock or deferred share units as of March 2, 2015, based on the closing price of our common stock on the New York Stock Exchange on that date.

 

Non-Employee Directors		Director    Since		Value of Alcoa Stock     or Deferred Share Units
Arthur D. Collins, Jr.		2010		$1,504,940
Kathryn S. Fuller		2002		$   667,441
Judith M. Gueron		1988		$   855,240
Michael G. Morris		2008		$1,408,243
E. Stanley O’Neal		2008		$   839,270
James W. Owens		2005		$   964,431
L. Rafael Reif		2015		**
Carol L. Roberts		2014		$   121,821
Patricia F. Russo		2008		$   824,332
Martin S. Sorrell		2012		$   324,550
Ratan N. Tata		2007		$   713,554
Ernesto Zedillo		2002		$1,155,241

**Mr.

Reif was appointed to the Board of Directors effective March 2, 2015.

Prohibitions against Short Sales, Hedging, Margin Accounts and Pledging

Company policy prohibits members of the Board of Directors from pledging, holding in margin accounts, or engaging in short sales or hedging transactions with respect to any of their Company stock. The policy continues to align the interest of our directors with those of our shareholders.

 

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Director Compensation (continued)

 

 

 

2014 Director Compensation

The following table sets forth the total compensation of the Company’s non-employee directors for the year ended December 31, 2014.

 

Name1 (a)		Fees Earned or     Paid in Cash ($) (b)		Change in Pension Value     and Nonqualified Deferred      Compensation Earnings ($) (f)		All Other     Compensation     ($) (g)		Total         ($) (h)
Arthur D. Collins, Jr.		$241,000						$241,000
Kathryn S. Fuller		$230,000				$  4,391		$234,391
Judith M. Gueron		$257,500		$121,394				$378,894
Michael G. Morris		$241,000						$241,000
E. Stanley O’Neal		$241,000						$241,000
James W. Owens		$257,500				$14,643		$272,143
Carol L. Roberts		$241,000						$241,000
Patricia F. Russo		$250,000						$250,000
Martin S. Sorrell		$230,000						$230,000
Ratan N. Tata		$230,000						$230,000
Ernesto Zedillo		$257,500				$  3,316		$260,816

1	Klaus Kleinfeld is a Company employee and receives no compensation for services as a director; his compensation is reflected in the “2014 Summary Compensation Table” on page 61. L. Rafael Reif joined the Board effective March 2, 2015 and is not included in the above table.

Explanation of information in the columns of the table:

Fees Earned or Paid in Cash (Column (b))

This column reflects the cash fees earned by directors for Board and committee service in 2014, whether or not such fees were deferred.

Stock Awards, Option Awards, and Non-Equity Incentive Plan Compensation (Columns (c), (d) and (e))

In 2014, we did not issue any stock or option awards to directors, and we do not have a non-equity incentive plan for directors. Accordingly, no such compensation is reported in the table, and we have omitted columns (c), (d) and (e) from the table.

Change in Pension Value and Nonqualified Deferred Compensation Earnings (Column (f))

This column reflects the change in pension value for a legacy plan described below under “Fee Continuation Plan for Non-Employee Directors.” The Company does not pay above-market or preferential earnings on fees that are deferred. The 2005 Deferred Fee Plan for Directors and a predecessor plan have the same investment options as the Company’s 401(k) tax-qualified savings plan for salaried employees. We therefore do not report earnings on deferred fees in column (f).

All Other Compensation (Column (g))

The amounts shown in this column for Ms. Fuller and Messrs. Owens and Zedillo represent imputed income related to a 2014 trip to Alcoa facilities by directors to review the Company’s operations. Spouses were invited to attend this trip and imputed income was charged to those directors whose spouses attended. This imputed income was primarily for air travel to and from New York and meals. Directors do not receive tax gross-ups for imputed income.

Fee Continuation Plan for Non-Employee Directors

The Company does not provide retirement benefits to non-employee directors under any current program. Ms. Gueron is the only current director entitled to receive retirement benefits under a legacy plan. She will receive annual payments in cash for life upon retirement from the Board under the terms of the Fee Continuation Plan for

 

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Director Compensation (continued)

 

 

 

Non-Employee Directors, which was frozen in 1995. The plan was amended in 2006 to provide that all payments would be made in cash rather than stock and cash, at the equivalent value of the payments plan participants would have received in stock and cash. The amounts reflected in column (f) of the 2014 Director Compensation table assume retirement with a present value of the accumulated stock-based portion of the award based on the 2014 year-end closing price of $15.79 per share as compared with a 2013 year-end closing price of $10.63 per share, and with the present value of annual stock grant payments assuming an annual stock increase of 4.00% per year consistent with Financial Accounting Standards Board’s Accounting Standards Codification Topic 715, Compensation—Retirement Benefits accounting valuation assumptions.

 

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Corporate Governance

 

 

Alcoa is a values-based company. Our values guide our behavior at every level and apply across the Company on a global basis. The Board has adopted a number of policies to support our values and good corporate governance, which we believe are important to the success of our business and in advancing shareholder interests.

Our values have been recognized by numerous awards:

 

Corporate Reputation and Leadership				Corporate Social Responsibility and Sustainability
•      Most Admired Metals Company FORTUNE Magazine, 2015				•      100 Best Corporate Citizens for 2014 Corporate Responsibility Magazine, 2014
•      CEO of the Year Platts Global Metals Awards, 2014				•      Aluminum Industry Leader on Dow Jones World Index Dow Jones Sustainability Indexes, 2014
•      Business Council for International Understanding Dwight D. Eisenhower Global Award, 2014
Diversity				Science and Technology
•     Human Rights Campaign Corporate Equality Award, 2015				•     Top Technology Innovations R&D Magazine, 2014

In addition to the other policies and procedures described in this section, we highlight below certain of our corporate governance practices:

 

 

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Corporate Governance (continued)

 

 

The Structure and Role of the Board of Directors

Board Leadership Structure

 

The Company’s current Board leadership structure comprises a combined Chairman of the Board and Chief Executive Officer, an independent director serving as the Lead Director and strong, active independent directors. Alcoa has had a strong, independent Lead Director for a number of years. The Board believes this structure provides a very well-functioning and effective balance between strong Company leadership and appropriate safeguards and oversight by independent directors. A combined role of Chairman and Chief Executive Officer confers advantages, including those listed below:

•

By serving in both positions, the Chairman and Chief Executive Officer is able to draw on his detailed knowledge of the Company to provide the Board, in coordination with the Lead Director, leadership in focusing its discussions and review of the Company’s strategy.

•

A combined role ensures that the Company presents its message and strategy to stakeholders with a unified voice.

•

The structure allows for efficient decision making and focused accountability.

The Board believes that it is in the best interest of the Company and its shareholders for Mr. Kleinfeld to serve as Chairman and Chief Executive Officer, considering the strong role of our independent Lead Director and other corporate governance practices providing independent oversight of management as set forth below.

 

 

Our independent Lead Director has substantial responsibilities.		Our Lead Director:   •     Presides at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors;
		•    Responds directly to shareholder and other stakeholder questions and comments that are directed to the Lead Director or to the independent directors as a group, with such consultation with the Chairman or other directors as the Lead Director may deem appropriate;
		•    Reviews and/or approves meeting agendas and schedules for the Board;
		•    Ensures personal availability for consultation and communication with independent directors and with the Chairman, as appropriate;
		•    Calls executive sessions of the Board;
		•    Calls special meetings of the independent directors, as the Lead Directors may deem to be appropriate; and
		•    In her capacity as Chair of the Governance and Nominating Committee, oversees the Board’s self-evaluation process.

Judith M. Gueron is our current Lead Director. Ms. Gueron, whose term as a director expires at the annual shareholders meeting on May 1, 2015, will not be standing for re-election. In accordance with the directors’ retirement policy in the Company’s Corporate Governance Guidelines, Ms. Gueron has announced her intention to retire from the Board effective May 1, 2015 as she would reach age 75 during a new three-year term.

To ensure a smooth transition of the Lead Director role, the Board deliberated on a candidate to succeed Ms. Gueron. Subject to her election by shareholders as a director for a new three-year term expiring in 2018, Patricia F. Russo was elected by the Board to succeed Ms. Gueron as Lead Director. In making its decision, the Board took into account factors such as Ms. Russo’s depth of experience in Board matters ranging from her service on the Company’s Compensation and Benefits Committee (as Chair), Governance and Nominating Committee and Executive Committee to her memberships on other company boards, Ms. Russo’s tireless and dedicated service as a member of the Board and her demonstrated leadership abilities.

 

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Corporate Governance (continued)

 

 

 

 

The Company’s corporate governance practices and policies are designed to protect shareholders’ long-term interests.		Shareholders’ interests are protected by substantial effective and independent oversight of management:   •    12 out of our 13 directors are independent as defined by the listing standards of the New York Stock Exchange (“NYSE”) and the Company’s Director Independence Standards.   •    The Board’s key standing committees are composed solely of independent directors. The Audit Committee, the Compensation and Benefits Committee, the Governance and Nominating Committee and the Public Issues Committee are each composed solely of independent directors. All members of the International Committee and the Executive Committee are independent directors other than Mr. Kleinfeld.   •     Our independent directors meet at every regular meeting in executive session without management or the Chairman and Chief Executive Officer present. These meetings are led by the Lead Director.

The Board’s Role in Risk Oversight

 

The Board of Directors is actively engaged in overseeing and reviewing the Company’s strategic direction and objectives, taking into account (among other considerations) the Company’s risk profile and exposures. It is management’s responsibility to manage risk and bring to the Board of Directors’ attention the most material risks to the Company. The Board of Directors has oversight responsibility of the processes established to report and monitor systems for material risks applicable to the Company. The Board annually reviews the Company’s enterprise risk management and receives regular updates on risk exposures.

 

The Board as a whole has responsibility for risk oversight, including succession planning relating to the Chief Executive Officer (“CEO”) and risks relating to the competitive landscape, strategy, business conditions and capital requirements. The committees of the Board also oversee the Company’s risk profile and exposures relating to matters within the scope of their authority. The Board regularly receives detailed reports from the committees regarding risk oversight in their areas of responsibility.

The Audit Committee regularly reviews treasury risks (including those relating to cash generation, liquidity, insurance, credit, debt, interest rates and foreign currency exchange rates), financial and accounting risks, legal and compliance risks, and risks relating to cyber security, tax matters, environmental remediation, and internal controls. The Audit Committee also regularly reviews commodities risk management, which includes hedging

 

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Corporate Governance (continued)

 

 

policies and practices and the relationship between the commodity pricing of aluminum on the London Metal Exchange and major cost inputs, including energy.

The Compensation and Benefits Committee considers risks related to the attraction and retention of talent, the design of compensation programs and incentive arrangements, and the investment management of the Company’s principal retirement and savings plans. The Company has determined that it is not reasonably likely that risks arising from compensation and benefit plans would have a material adverse effect on the Company. See “Executive Compensation—Compensation Discussion and Analysis—Other Compensation Policies and Practices—What We Do—We Have a Conservative Compensation Risk Profile” on page 59.

The Governance and Nominating Committee considers risks related to corporate governance, and oversees succession planning for the Board of Directors and the appropriate assignment of directors to the Board committees for risk oversight and other areas of responsibilities.

The International Committee considers risks posed by global developments.

The Public Issues Committee considers risks related to the Company’s reputation, and risks relating to environmental and sustainability matters, health and safety issues, and community/government relations.

The Company believes that the Board leadership structure supports its role in risk oversight. There is open communication between management and directors, and all directors are actively involved in the risk oversight function.

Director Qualifications, Board Diversity and Board Tenure

 

Our directors have a broad range of experience that spans different industries, encompassing the business, philanthropic, academic and governmental sectors. Directors bring to our Board a variety of skills, qualifications and viewpoints that strengthen their ability to carry out their oversight role on behalf of our shareholders. As described in the director biographies in “Item 1 Election of Directors,” directors bring to our Board attributes and skills that include those listed below:

 

Director Attributes and Skills
•   Leadership Experience •   Global/International Experience •    Finance Experience •   Economics Expertise •   Investment Banking Experience •    Academia		•    Risk Management Expertise •   Manufacturing/Industrial Experience •   Energy Industry Experience •    Government Relations Experience •    Environmental and Sustainability Experience		•   Engineering Experience •   Technology/Innovation Expertise •    Marketing and Branding Expertise •    Corporate Governance Expertise •   Human Resources Experience

 

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Corporate Governance (continued)

 

 

 

Board Meetings and Attendance

 

The Board met eight times in 2014. Attendance by directors at Board and committee meetings averaged 94%. Each director attended 75% or more of the aggregate of all meetings of the Board and the committees on which he or she served during 2014.

Under Alcoa’s Corporate Governance Guidelines, all directors are expected to attend the annual meeting of shareholders. All members of the Board attended the Company’s 2014 annual meeting other than Mr. Tata. In addition to Board meetings, directors annually visit Alcoa business operations to deepen their understanding of the Company and interact with on-site employees. In 2014, the Board visited the business units of Alcoa’s Engineered Products and Solutions group in the United Kingdom and France. In addition, new directors receive an orientation that includes meetings with key management and visits to Company facilities.

Board, Committee and Director Evaluations

 

The Board of Directors annually assesses the effectiveness of the full Board, the operations of its committees and the contributions of director nominees. The Governance and Nominating Committee oversees the evaluation of the Board as a whole and its committees, as well as individual evaluations of those directors who are being considered for possible re-nomination to the Board.

Committees of the Board

There are six standing committees of the Board. The Board has adopted written charters for each committee, which are available on our website at http://www.alcoa.com under “About—Corporate Governance—Committees.”

Each of the Audit, Compensation and Benefits, Governance and Nominating and Public Issues Committees consists solely of directors who have been determined by the Board of Directors to be independent in accordance with Securities and Exchange Commission (“SEC”) regulations, NYSE listing standards and the Company’s Director Independence Standards (including the heightened independence standards for members of the Audit and Compensation and Benefits Committees).

 

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Corporate Governance (continued)

 

 

 

The following table sets forth the Board committees and the current members of each of the committees:

 

Audit

Compensation  and Benefits

Governance and  Nominating

Public Issues

Executive

International

Arthur D. Collins, Jr.*

X

X

Kathryn S. Fuller*

X

X

Judith M. Gueron*

Chair

X

X

Klaus Kleinfeld

Chair

Chair

Michael G. Morris*

X

X

X

X

E. Stanley O’Neal*

X

X

X

James W. Owens*

Chair

L. Rafael Reif*1

Carol L. Roberts*

X

Patricia F. Russo*

Chair

X

X

Martin S. Sorrell*

X

X

Ratan N. Tata*

X

X

Ernesto Zedillo*

X

Chair

2014 Meetings

8

62

6

5

33

4

*	Independent Director

1	Mr. Reif was appointed to the Board of Directors effective March 2, 2015, and will be appointed to serve on a Board committee at a later date.

2	Compensation and Benefits Committee took action by unanimous written consent once.

3	Executive Committee took action by unanimous written consent twice.

 

COMMITTEE		RESPONSIBILITIES
Audit Committee		•    Oversees the integrity of the financial statements and internal controls, including review of the scope and the results of the audits of the internal and independent auditors
		•    Appoints the independent auditors and evaluates their independence and performance
		•    Reviews the organization, performance and adequacy of the internal audit function
		•    Pre-approves all audit, audit-related, tax and other services to be provided by the independent auditors
		•    Oversees the Company’s compliance with legal, ethical and regulatory requirements
		•    Discusses with management and the auditors the policies with respect to risk assessment and risk management, including major financial risk exposures
Each member of the Audit Committee is financially literate, and the Board of Directors has determined that each member qualifies as an “audit committee financial expert” under applicable SEC rules. No committee member currently sits on more than one other public company’s audit committee.
Compensation and Benefits Committee		•    Establishes the Chief Executive Officer’s compensation based upon an evaluation of performance in light of approved goals and objectives
		•    Reviews and approves the compensation of the Company’s officers
		•    Oversees the implementation and administration of the Company’s compensation and benefits plans, including pension, savings, incentive compensation and equity-based plans
		•    Reviews and approves general compensation and benefit policies
		•    Approves the Compensation Discussion and Analysis for inclusion in the proxy statement
		•    Has the sole authority to retain and terminate a compensation consultant, as well as to approve the consultant’s fees and other terms of engagement (see “Compensation Consultants” beginning on page 28 regarding the committee’s engagement of a compensation consultant)
The Compensation and Benefits Committee may form and delegate its authority to subcommittees when appropriate (including subcommittees of management). Executive officers do not determine the amount or form of executive or director compensation although the Chief Executive Officer provides recommendations to the Compensation and Benefits Committee regarding compensation changes and incentive compensation for executive officers other than himself. For more information on the responsibilities and activities of the committee, including its processes for determining executive compensation, see the “Compensation Discussion and Analysis” section.

 

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Corporate Governance (continued)

 

 

 

COMMITTEE		RESPONSIBILITIES
Executive Committee		•   Has the authority to act on behalf of the Board
Governance and Nominating Committee		•  Identifies individuals qualified to become Board members and recommends them to the full Board for consideration, including evaluating all potential candidates, whether initially recommended by management, other Board members or shareholders
		•  Makes recommendations to the Board regarding Board committee assignments
		•  Develops and annually reviews corporate governance guidelines for the Company, and oversees other corporate governance matters
		•  Reviews related person transactions
		•  Coordinates an annual performance review of the Board, Board committees and individual director nominees
		•  Periodically reviews and makes recommendations to the Board regarding director compensation
International Committee		•  Provides a forum for additional discussion and input on international markets, business conditions and political developments
Public Issues Committee		•  Provides guidance on matters relating to the Company’s corporate social responsibility, including good corporate citizenship, environmental sustainability, health and safety and social issues
		•  Oversees and monitors the Company’s policies and practices to ensure alignment with the Company’s vision and values
		•  Advises on significant public issues that are pertinent to the Company and its stakeholders
		•  Considers, and brings to the attention of the Board as appropriate, political, social and environmental trends and major global legislative and regulatory developments or other public policy issues
		•  Oversees the Company’s policies and practices relating to the Company’s political activities, diversity and charitable contributions
		•  Monitors the Company’s reputation and environmental sustainability progress
All Board members are invited to the meetings of the Public Issues Committee, and most directors typically attend.

Majority Voting for Directors

Alcoa’s Articles of Incorporation and By-Laws provide a majority voting standard for election of directors in uncontested elections. If an incumbent director nominee receives a greater number of votes cast against his or her election than in favor of his or her election (excluding abstentions) in an uncontested election, the nominee must immediately tender his or her resignation, and the Board will decide, through a process managed by the Governance and Nominating Committee and excluding the nominee, whether to accept the resignation at its next regularly scheduled Board meeting. The Board’s explanation of its decision will be promptly disclosed in accordance with SEC rules and regulations. An election of directors is considered to be contested if there are more nominees for election than positions on the Board to be filled by election at the meeting of shareholders. Any director nominee not already serving on the Board who fails to receive a majority of votes cast in an uncontested election will not be elected to the Board.

Communications with Directors

The Board of Directors welcomes input and suggestions. Shareholders and other interested parties wishing to contact the Lead Director or the non-management directors as a group may do so by sending a written communication to the attention of the Lead Director c/o Alcoa Inc., Corporate Secretary’s Office, 390 Park Avenue, New York, NY 10022-4608. To communicate issues or complaints regarding questionable accounting, internal accounting controls or auditing matters, send a written communication to the Audit Committee c/o Alcoa Inc., Corporate Secretary’s Office, 390 Park Avenue, New York, NY 10022-4608. Alternatively, you may place an anonymous, confidential, toll free call in the United States to Alcoa’s Integrity Line at 1 800 346-7319. For a listing of Integrity Line telephone numbers outside the United States, go to http://www.alcoa.com “About Alcoa—Corporate Governance—Ethics and Compliance.”

Communications addressed to the Board or to a Board member are distributed to the Board or to any individual director or directors as appropriate, depending upon the facts and circumstances outlined in the communication.

 

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Corporate Governance (continued)

 

 

 

The Board of Directors has asked the Corporate Secretary’s Office to submit to the Board all communications received, excluding only those items that are not related to Board duties and responsibilities, such as junk mail and mass mailings; product complaints and product inquiries; new product or technology suggestions; job inquiries and resumes; advertisements or solicitations; and surveys.

Director Independence

In its Corporate Governance Guidelines, the Board recognizes that independence depends not only on directors’ individual relationships, but also on the directors’ overall attitude. Providing objective, independent judgment is at the core of the Board’s oversight function. Under the Company’s Director Independence Standards, which conform to the corporate governance listing standards of the New York Stock Exchange, a director is not considered “independent” unless the Board affirmatively determines that the director has no material relationship with the Company or any subsidiary in the consolidated group. The Director Independence Standards comprise a list of all categories of material relationships affecting the determination of a director’s independence. Any relationship that falls below a threshold set forth in the Director Independence Standards, or is not otherwise listed in the Director Independence Standards, and is not required to be disclosed under Item 404(a) of SEC Regulation S-K, is deemed to be an immaterial relationship.

The Board has affirmatively determined that all the directors are independent except Mr. Kleinfeld, who is employed by the Company (and therefore does not meet the independence standards set forth in the Director Independence Standards). In the course of its determination regarding independence, the Board did not find any material relationships between the Company and any of the directors, other than Mr. Kleinfeld’s employment.

Related Person Transactions

Review, Approval and Ratification of Transactions with Related Persons

 

The Company has a written Related Person Transaction Approval Policy regarding the review, approval and ratification of transactions between the Company and related persons. The policy applies to any transaction in which the Company or a Company subsidiary is a participant, the amount involved exceeds $120,000 and a related person has a direct or indirect material interest. A related person means any director or executive officer of the Company, any nominee for director, any shareholder known to the Company to be the beneficial owner of more than 5% of any class of the Company’s voting securities, and any immediate family member of any such person.

Under this policy, reviews are conducted by management to determine which transactions or relationships should be referred to the Governance and Nominating Committee for consideration. The Governance and Nominating Committee then reviews the material facts and circumstances regarding a transaction and determines whether to approve, ratify, revise or reject a related person transaction, or to refer it to the full Board or another committee of the Board for consideration. The Company’s Related Person Transaction Approval Policy operates in conjunction with other aspects of the Company’s compliance program, including its Business Conduct Policies which require that all directors, officers and employees have a duty to be free from the influence of any conflict of interest when they represent the Company in negotiations or make recommendations with respect to dealings with third parties, or otherwise carry out their duties with respect to the Company.

The Board has considered the following types of potential related person transactions and pre-approved them under the Company’s Related Person Transaction Approval Policy as not presenting material conflicts of interest:

(i)	employment of executive officers (except employment of an executive officer that is an immediate family member of another executive officer, director, or nominee for director) as long as the Compensation and Benefits Committee has approved the executive officers’ compensation;

(ii)	director compensation that the Board has approved;

 

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(iii)

any transaction with another entity in which the aggregate amount involved does not exceed the greater of $1,000,000 or 2% of the other entity’s total annual revenues, if a related person’s interest arises only from:

(a)

such person’s position as an employee or executive officer of the other entity; or

(b)

such person’s position as a director of the other entity; or

(c)

the ownership by such person, together with his or her immediate family members, of less than a 10% equity interest in the aggregate in the other entity (other than a partnership); or

(d)

both such position as a director and ownership as described in (b) and (c) above; or

(e)

such person’s position as a limited partner in a partnership in which the person, together with his or her immediate family members, have an interest of less than 10%;

(iv)	charitable contributions in which a related person’s only relationship is as an employee (other than an executive officer), or a director or trustee, if the aggregate amount involved does not exceed the greater of $250,000 or 2% of the charitable organization’s total annual receipts;

(v)	transactions, such as the receipt of dividends, in which all shareholders receive proportional benefits;

(vi)	transactions involving competitive bids;

(vii)

transactions involving the rendering of services as a common or contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority; and

(viii)

transactions with a related person involving services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture, or similar services.

Transactions with Related Persons in 2014

 

Based on information provided by the directors, the executive officers, and the legal department, the Governance and Nominating Committee determined that there are no material related person transactions to be reported in this proxy statement. We indemnify our directors and officers to the fullest extent permitted by law against personal liability in connection with their service to the Company. This indemnity is required under the Company’s Articles of Incorporation and the By-Laws, and we have entered into agreements with these individuals contractually obligating us to provide this indemnification to them.

Compensation Committee Interlocks and Insider Participation

No member of the Compensation and Benefits Committee has served as one of our officers or employees at any time. None of our executive officers serves as a member of the compensation committee of any other company that has an executive officer serving as a member of our Board. None of our executive officers serves as a member of the board of directors of any other company that has an executive officer serving as a member of our Compensation and Benefits Committee.

Compensation Consultants

During 2014, the Compensation and Benefits Committee continued its retention of Pay Governance LLC as its independent compensation consultant. See “Compensation Discussion and Analysis—Other Compensation Policies and Practices—What We Do—The Compensation Committee Retains an Independent Compensation Consultant” on page 59. The committee assessed Pay Governance’s independence and found no conflict of interest. In its assessment, the committee took into account the following factors:

•

Pay Governance provides no other services to the Company;

•

the amount of fees received from the Company by Pay Governance as a percentage of Pay Governance’s total revenue;

•

the policies and procedures that Pay Governance has in place to prevent conflicts of interest;

•

any business or personal relationships between the consultant(s) at Pay Governance performing consulting services and any Compensation and Benefits Committee members or any executive officer; and

•

any ownership of Company stock by the consultant(s).

 

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Corporate Governance (continued)

 

 

 

During 2014, the Governance and Nominating Committee continued to retain Pearl Meyer & Partners to provide consultation services regarding non-employee director compensation. The committee did not find any conflict of interest with Pearl Meyer and considered the following factors in its determination:

•

Pearl Meyer provides no other services to the Company;

•

the amount of fees received from the Company by Pearl Meyer as a percentage of Pearl Meyer’s total revenue;

•

the policies and procedures that Pearl Meyer has in place to prevent conflicts of interest;

•

any business or personal relationships between the consultant(s) at Pearl Meyer performing consulting services and any Board members or any executive officer; and

•

any ownership of Company stock by the consultant(s).

Business Conduct Policies and Code of Ethics

The Company’s Business Conduct Policies, which have been in place for many years, apply equally to the directors and to all officers and employees of the Company, as well as those of our controlled subsidiaries, affiliates and joint ventures. The directors and employees in positions to make discretionary decisions are surveyed annually regarding their compliance with the policies.

The Company also has a Code of Ethics applicable to the CEO, CFO and other financial professionals, including the principal accounting officer, and those subject to it are surveyed annually for compliance with it. Only the Audit Committee can amend or grant waivers from the provisions of the Company’s Code of Ethics, and any such amendments or waivers will be posted promptly at http://www.alcoa.com . To date, no such amendments have been made or waivers granted.

 

Recovery of Incentive Compensation

The Board of Directors adopted the following policy in 2006:

If the Board learns of any misconduct by an executive officer that contributed to the Company having to restate all or a portion of its financial statements, it shall take such action as it deems necessary to remedy the misconduct, prevent its recurrence and, if appropriate, based on all relevant facts and circumstances, take remedial action against the wrongdoer in a manner it deems appropriate. In determining what remedies to pursue, the Board shall take into account all relevant factors, including whether the restatement was the result of negligent, intentional or gross misconduct. The Board will, to the full extent permitted by governing law, in all appropriate cases, require reimbursement of any bonus or incentive compensation awarded to an executive officer or effect the cancellation of

 

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Corporate Governance (continued)

 

 

 

unvested restricted or deferred stock awards previously granted to the executive officer if: a) the amount of the bonus or incentive compensation was calculated based upon the achievement of certain financial results that were subsequently the subject of a restatement, b) the executive engaged in intentional misconduct that caused or partially caused the need for the restatement, and c) the amount of the bonus or incentive compensation that would have been awarded to the executive had the financial results been properly reported would have been lower than the amount actually awarded. In addition, the Board may dismiss the executive officer, authorize legal action for breach of fiduciary duty or take such other action to enforce the executive’s obligations to Alcoa Inc. as the Board determines fit the facts surrounding the particular case. The Board may, in determining appropriate remedial action, take into account penalties or punishments imposed by third parties, such as law enforcement agencies, regulators or other authorities. The Board’s power to determine the appropriate punishment for the wrongdoer is in addition to, and not in replacement of, remedies imposed by such entities.

The Incentive Compensation Plan was amended in 2006 to incorporate this policy. This plan governs annual incentive compensation awards to a large number of executives and managers. The 2009 Alcoa Stock Incentive Plan, Alcoa’s Section 162(m) Compliant Annual Cash Incentive Compensation Plan and the 2013 Alcoa Stock Incentive Plan, which were approved by shareholders in 2009, 2011 and 2013, respectively, also incorporate this policy.

Other Matters

Litigation Proceedings Involving Directors or Officers

 

As previously reported in the Company’s other SEC filings, three shareholder derivative actions were brought against certain officers or employees and directors of Alcoa claiming breach of fiduciary duty and other violations and were based on the allegations made in the previously disclosed civil litigation brought by Aluminium Bahrain B.S.C (“Alba”) against Alcoa, Alcoa World Alumina LLC, Victor Dahdaleh, and others, and the subsequent investigations of Alcoa by the United States Department of Justice and the SEC with respect to Alba’s claims.

On July 21, 2008, the Teamsters Local #500 Severance Fund and the Southeastern Pennsylvania Transportation Authority (collectively, “Teamsters”) filed a shareholder derivative suit in the civil division of the Court of Common Pleas of Allegheny County, Pennsylvania (the “Court”). On October 12, 2009, the Court stayed this action until further order of the Court.

On March 6, 2009, the Philadelphia Gas Works Retirement Fund (“Philadelphia Gas”) filed a separate shareholder derivative suit in the civil division of the Court of Common Pleas of Philadelphia County, Pennsylvania. On September 18, 2009, pursuant to an unopposed motion of certain defendants to coordinate the case with the Teamsters suit described above, the Court transferred the Philadelphia Gas case to Allegheny County from Philadelphia County. The Teamsters and Philadelphia Gas derivative actions claimed that the defendants caused or failed to prevent the matters alleged in the Alba lawsuit.

On June 19, 2012, Catherine Rubery (“Rubery”) filed a separate shareholder derivative suit in the United States District Court for the Western District of Pennsylvania. The Rubery derivative action claimed that the defendants caused or failed to prevent illegal bribes of foreign officials, failed to implement an internal controls system to prevent bribes from occurring and wasted corporate assets by paying improper bribes and incurring substantial legal liability. Furthermore, the plaintiff sought an order of contribution and indemnification from defendants.

On October 1, 2014, the Board of Directors approved a settlement-in-principle of the three pending derivative actions described above. The settlement of the derivative actions was preliminarily approved by the Court on October 22, 2014. On January 20, 2015, following a hearing, the Court formally approved the settlement, entering its order of judgment approving the resolution and noting its findings in its conference notes. This settlement, which provided for compliance program improvements and plaintiffs’ legal fees in an immaterial amount, resolves all derivative claims against the current and former officers and members of the Alcoa Board of Directors named as defendants, as well as William Rice, stemming from the Alba allegations.

 

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Corporate Governance (continued)

 

 

 

The three derivative suits are more fully described in Alcoa’s Annual Report on Form 10-K for the year ended December 31, 2014 in Part 1, Item 3 “Legal Proceedings.”

Pursuant to the indemnification described under “Director Independence and Related Person Transactions” above, the Company paid the expenses, including attorneys’ fees, incurred by certain officers and directors of Alcoa in defending these actions. Each of these individuals provided an undertaking to repay all amounts advanced if it was ultimately determined that he or she was not entitled to be indemnified.

 

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2015 PROXY STATEMENT

Section 16(a) Beneficial Ownership Reporting Compliance

 

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers, and persons who beneficially own more than ten percent of a registered class of the Company’s equity securities, to file initial reports of ownership and reports of changes in ownership of the Company’s common stock and other equity securities with the SEC within specified periods. Due to the complexity of the reporting rules, the Company undertakes to file such reports on behalf of its directors and executive officers and has instituted procedures to assist them with these obligations. Based solely on a review of filings with the SEC and written representations from the Company’s directors and executive officers, the Company believes that in 2014 all of its directors and executive officers filed the required reports on a timely basis under Section 16(a).

Alcoa Stock Ownership

Stock Ownership of Certain Beneficial Owners

The following shareholders reported to the Securities and Exchange Commission that they beneficially owned more than 5% of Alcoa common stock as of December 31, 2014.

 

Name and Address of Beneficial Owner		Title of Class				Amount and Nature of Beneficial Ownership (#)				Percent of Class
The Vanguard Group   100 Vanguard Boulevard   Malvern, PA 19355			Common Stock				94,210,566	1			7.7	%
BlackRock Inc.   55 East 52nd Street   New York, NY 10022			Common Stock				71,836,504	2			6.1	%
JPMorgan Chase & Co.   270 Park Avenue   New York, NY 10017			Common Stock				68,451,668	3			5.6	%

1

As reported in a Schedule 13G amendment dated February 9, 2015. The Vanguard Group, an investment adviser, reported that it had sole power to vote 2,014,239 shares, sole power to dispose of 92,330,971 shares, shared power to vote none of the reported shares, and shared power to dispose of 1,879,595 shares.

2	As reported in a Schedule 13G amendment dated January 12, 2015. BlackRock Inc., a parent holding company, reported that it had sole power to vote 60,838,987 shares, sole power to dispose of 71,754,688 shares, and shared power to vote and dispose of 81,816 shares.

3	As reported in a Schedule 13G dated January 23, 2015. JPMorgan Chase & Co., a parent holding company, reported that it had sole power to vote 60,322,801 shares, sole power to dispose of 67,730,576 shares, shared power to vote 606,695 shares, and shared power to dispose of 721,092 shares.

 

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Alcoa Stock Ownership (continued)

 

 

 

Stock Ownership of Directors and Executive Officers

The following table shows the ownership of Alcoa common stock, as of March 2, 2015, by each director, each of the named executive officers, and all directors and executive officers (serving as of March 2, 2015) as a group.

Mr. Kleinfeld is required to own shares of Alcoa common stock equal in value to six times his annual salary and each of the other named executive officers is required to own shares of Alcoa common stock equal in value to three times his or her annual salary. These officers are required to maintain that investment until retirement from the Company.

Non-employee directors are required to own, until retirement from the Board, at least $750,000 (this amount was increased from $400,000 effective January 1, 2015) in Alcoa common stock. Compliance with the ownership value requirement is measured annually and if the stock price declines in value, directors must continue to invest in Alcoa stock until the stock ownership guideline is reached. To satisfy this requirement, directors must either invest in Alcoa deferred share units under the Company’s 2005 Deferred Fee Plan for Directors or purchase shares in the open market. Deferred share units provide directors with the same economic interest as if they own Alcoa common stock. The deferred share units track the performance of our common stock and accrue dividend equivalents that are equal in value to dividends paid on our common stock.

 

Name of Beneficial Owner		Shares of Common Stock1				Deferred Share Units2				Total
Directors
Arthur D. Collins, Jr.			—				101,104				101,104
Kathryn S. Fuller			—				44,840				44,840
Judith M. Gueron			15,941				41,446				57,387
Michael G. Morris			30,120				64,357				94,477
E. Stanley O’Neal			—				56,384				56,384
James W. Owens			15,025	3			49,702				64,727
L. Rafael Reif			—	4			—	4			—	4
Carol L. Roberts			—				8,184				8,184
Patricia F. Russo			10,000	5			45,336				55,336
Martin S. Sorrell			21,709				—				21,709
Ratan N. Tata			47,729				—				47,729
Ernesto Zedillo			—				77,611				77,611
Named Executive Officers
Klaus Kleinfeld *			3,547,630				37,067				3,584,697
William F. Oplinger			285,472				2,763				288,235
Olivier M. Jarrault			445,115				—				445,115
Audrey Strauss			149,653				3,041				152,694
Robert G. Wilt			162,898				—				162,898
All Directors and Executive Officers as a Group (20 individuals)			5,243,982				532,657				5,776,639

*	Also serves as a director

1

This column shows beneficial ownership of Alcoa common stock as calculated under SEC rules. Unless otherwise noted, each director and named executive officer has sole voting and investment power over the shares of Alcoa common stock reported. None of the shares are subject to pledge. This column includes shares held of record, shares held by a bank, broker or nominee for the person’s account, shares held through family trust arrangements, and for executive officers, share equivalent units held in the Alcoa Retirement Savings Plan which confer voting rights through the plan trustee with respect to shares of Alcoa common stock. This column also includes shares of Alcoa common stock that may be acquired under employee stock options that are exercisable as of March 2, 2015 or will become exercisable within 60 days after March 2, 2015 as follows: Mr. Kleinfeld (2,450,467); Mr. Oplinger (218,137); Mr. Jarrault (292,057); Ms. Strauss (146,084); and Mr. Wilt (141,594); and all executive officers as a group (3,647,064). No awards of stock options have been made to non-employee directors. As of March 2, 2015, individual directors and executive officers, as well as all directors and executive officers as a group, beneficially owned less than 1% of the outstanding shares of common stock.

 

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Alcoa Stock Ownership (continued)

 

 

 

2

This column lists (i) for executive officers, deferred share equivalent units held under the Alcoa Deferred Compensation Plan, and (ii) for directors, deferred share equivalent units held under the 2005 Deferred Fee Plan for Directors and the Deferred Fee Plan for Directors (in effect before 2005). Each deferred share equivalent unit tracks the economic performance of one share of Alcoa common stock and is fully vested upon grant, but does not have voting rights.

3	Held by a trust of which Mr. Owens and his spouse are trustees and beneficiaries.

4

Mr. Reif was appointed to the Board of Directors effective March 2, 2015. The initial disbursement of his director compensation will be made on April 1, 2015. Under Alcoa’s director compensation program effective January 1, 2015, Mr. Reif will receive an annual retainer of $240,000 comprising 50% in cash and 50% invested in Alcoa deferred share units under the 2005 Deferred Fee Plan for Directors or invested in Alcoa stock purchased on the open market until he meets the stock ownership requirement of $750,000.

5	Held by a trust of which Ms. Russo is the trustee and a beneficiary.

 

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Item 2 Ratification of Appointment of Independent Registered Public Accounting Firm

 

 

Under its written charter, the Audit Committee of the Board of Directors has sole authority and is directly responsible for the appointment, retention, compensation, oversight, evaluation and termination of the independent registered public accounting firm retained to audit the Company’s financial statements.

The Audit Committee annually evaluates the qualifications, performance and independence of the Company’s independent auditors. Based on its evaluation, the Audit Committee has appointed PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2015. PricewaterhouseCoopers LLP or its predecessor, Coopers & Lybrand, has served continuously as the Company’s independent auditors since 1973. The Audit Committee and the Board believe that the continued retention of PricewaterhouseCoopers LLP to serve as the Company’s independent registered public accounting firm is in the best interests of the Company and its shareholders.

The Audit Committee is responsible for the approval of the engagement fees and terms associated with the retention of PricewaterhouseCoopers LLP. In addition to assuring the regular rotation of the lead audit partner as required by law, the Audit Committee is involved in the selection and evaluation of the lead audit partner and considers whether, in order to assure continuing auditor independence, there should be a regular rotation of the independent registered public accounting firm.

Although the Company’s By-Laws do not require that we seek shareholder ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm, we are doing so as a matter of good corporate governance. If the shareholders do not ratify the appointment, the Audit Committee will reconsider whether or not to retain PricewaterhouseCoopers LLP.

Representatives of PricewaterhouseCoopers LLP are expected to be present at the annual meeting, will have the opportunity to make a statement if they desire to do so, and will be available to respond to appropriate questions by shareholders.

 

The Board of Directors recommends a vote “FOR” ITEM 2, to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2015.

 

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Item 2 Ratification of Appointment of Independent Registered Public Accounting Firm (continued)

 

 

 

Report of the Audit Committee

In accordance with its written charter, the Audit Committee of the Board of Directors is responsible for assisting the Board to fulfill its oversight of:

•

the integrity of the Company’s financial statements and internal controls,

•

the Company’s compliance with legal and regulatory requirements,

•

the independent auditors’ qualifications and independence, and

•

the performance of the Company’s internal audit function and independent auditors.

It is the responsibility of the Company’s management to prepare the Company’s financial statements and to develop and maintain adequate systems of internal accounting and financial controls. The Company’s internal auditors are responsible for conducting internal audits intended to evaluate the adequacy and effectiveness of the Company’s financial and operating internal control systems.

PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm for 2014 (the independent auditors), is responsible for performing independent audits of the Company’s consolidated financial statements and internal control over financial reporting and issuing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States of America (GAAP) and on the effectiveness of the Company’s internal control over financial reporting. The independent auditors also review the Company’s interim financial statements in accordance with applicable auditing standards.

In evaluating the independence of PricewaterhouseCoopers LLP, the Audit Committee has (i) received the written disclosures and the letter from PricewaterhouseCoopers LLP required by applicable requirements of the Public Company Accounting Oversight Board (PCAOB) regarding the audit firm’s communications with the Audit Committee concerning independence, (ii) discussed with PricewaterhouseCoopers LLP the firm’s independence from the Company and management and (iii) considered whether PricewaterhouseCoopers LLP’s provision of non-audit services to the Company is compatible with the auditors’ independence. In addition, the Audit Committee has assured that the lead audit partner is rotated at least every five years in accordance with Securities and Exchange Commission and PCAOB requirements, and considered whether there should be a regular rotation of the audit firm itself in order to assure the continuing independence of the outside auditors. The Audit Committee has concluded that PricewaterhouseCoopers LLP is independent from the Company and its management.

The Audit Committee has reviewed with the independent auditors and the Company’s internal auditors the overall scope and specific plans for their respective audits, and the Audit Committee regularly monitored the progress of both in assessing the Company’s compliance with Section 404 of the Sarbanes-Oxley Act, including their findings, required resources and progress to date.

At every regular meeting, the Audit Committee meets separately, and without management present, with the independent auditors and the Company’s Vice President—Internal Audit to review the results of their examinations, their evaluations of the Company’s internal controls, and the overall quality of the Company’s accounting and financial reporting. The Audit Committee also meets separately at its regular meetings with the Chief Financial Officer and the Chief Legal Officer, and meets separately twice a year with the Chief Ethics and Compliance Officer.

The Audit Committee has met and discussed with management and the independent auditors the fair and complete presentation of the Company’s financial statements. The Audit Committee has also discussed and reviewed with the independent auditors all communications required by GAAP, including those described in Auditing Standards No. 16, “Communication with Audit Committees”, as adopted by the PCAOB. The Audit Committee has discussed significant accounting policies applied in the financial statements, as well as alternative treatments. Management has represented that the consolidated financial statements have been prepared in accordance with GAAP, and the Audit Committee has reviewed and discussed the audited consolidated financial statements with both management and the independent auditors.

 

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Item 2 Ratification of Appointment of Independent Registered Public Accounting Firm (continued)

 

 

 

Relying on the foregoing reviews and discussions, the Audit Committee recommended to the Board of Directors, and the Board approved, inclusion of the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for filing with the Securities and Exchange Commission. In addition, the Audit Committee has approved, subject to shareholder ratification, the selection of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2015.

The Audit Committee

James W. Owens, Chair

Arthur D. Collins, Jr.

Michael G. Morris

E. Stanley O’Neal

Carol L. Roberts

Ernesto Zedillo

February 19, 2015

Audit and Non-Audit Fees

The following table shows fees for professional services rendered by PricewaterhouseCoopers LLP for the past two fiscal years ended December 31 (in millions):

 

		2014		2013
Audit Fees		$13.7		$13.5
Audit-Related Fees		$  0.6		$  0.6
Tax Fees		$  0.6		$  0.1
All Other Fees		$  0.1		$  0.1

The Audit Committee has adopted policies and procedures for pre-approval of audit, audit-related, tax and other services, and for pre-approval of fee levels for such services. See Attachment A, “Pre-Approval Policies and Procedures for Audit and Non-Audit Services.” All services set forth in the table above were approved by the Audit Committee before being rendered.

Audit Fees include the base audit fee, effects of foreign currency exchange rates on the base audit fee, scope adjustments to the base audit requirements, and accounting and audit advisory services. The increase in audit fees from 2013 to 2014 was principally due to scope increases to accommodate the Firth Rixson acquisition.

Audit-Related Fees include due diligence services for acquisitions and divestitures, audits of employee benefit plans, agreed-upon or expanded audit procedures for accounting or regulatory requirements, information system controls procedures, and review or verification of reported sustainability information.

Tax Fees include U.S. federal, state and local tax support and international tax support. The increase in tax fees from 2013 to 2014 was principally due to additional tax support in connection with the Firth Rixson acquisition.

All Other Fees include services to review the Company’s actuarial calculations for its captive insurance company.

 

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Item 3 Advisory Approval of Executive Compensation

 

 

As required pursuant to Section 14A of the Securities Exchange Act of 1934, the Board of Directors is asking you to approve, on an advisory basis, the executive compensation programs and policies and the resulting 2014 compensation of the individuals listed in the “2014 Summary Compensation Table” on page 61 (our “named executive officers”), as described in this proxy statement.

Because the vote is advisory, the result will not be binding on the Compensation and Benefits Committee and it will not affect, limit or augment any existing compensation or awards. The Compensation and Benefits Committee will, however, take into account the outcome of the vote when considering future compensation arrangements.

The Board has approved an annual frequency for advisory shareholder votes to approve executive officer compensation. As a result, unless the Board determines otherwise, the next such vote will be held at the Company’s 2016 annual meeting.

We believe you should read the Compensation Discussion and Analysis and the compensation tables in determining whether to approve this proposal.

The Board of Directors recommends approval of the following resolution:

RESOLVED, that the compensation paid to the Company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, the executive compensation tables and the related narrative discussion, is hereby APPROVED.

 

The Board of Directors recommends a vote “FOR” ITEM 3, to approve, on an advisory basis, the compensation of the Company’s named executive officers, as stated in the above resolution.

 

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Item 3 Advisory Approval of Executive Compensation (continued)

 

 

 

Compensation Committee Report

The Compensation and Benefits Committee (the “Committee”) has:

 

1.	reviewed and discussed with management the Compensation Discussion and Analysis included in this proxy statement; and

2.	based on the review and discussions referred to in paragraph (1) above, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s proxy statement relating to the 2015 annual meeting of shareholders.

The Compensation and Benefits Committee

Patricia F. Russo, Chair

Arthur D. Collins, Jr.

Kathryn S. Fuller

Michael G. Morris

February 19, 2015

 

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Executive Compensation

 

 

Compensation Discussion and Analysis

Executive Summary

 

Alcoa’s Executive Compensation Philosophy Drove Strong Operating and Financial Performance in 2014

Global Environment: As a global leader in lightweight metals technology, engineering and manufacturing, Alcoa is investing in its value-add, multi-material businesses while increasing the long-term global competitiveness of its commodity businesses. Since external factors influencing the aluminum market create volatility and uncertainty, Alcoa has undertaken this portfolio transformation in a challenging environment. Despite these challenges, Alcoa’s management has achieved productivity gains and profitable growth that have contributed to Alcoa’s strong stock performance. 

Alcoa’s executive compensation philosophy: To incentivize outstanding management performance, the Alcoa Board of Directors’ Compensation and Benefits Committee (“Compensation Committee” or “Committee”) has structured executive pay programs that place a strong emphasis on equity incentives; are explicitly designed to attract, motivate, align and retain key executives; and generate superior operating results that support improvements in Alcoa’s Total Shareholder Return (TSR). Integrated with Alcoa’s strategy, structure and values, our compensation programs have enabled Alcoa to assemble a highly-focused leadership team that takes accountability for achieving—and exceeding—targets in the most difficult environments. Our pay-for-performance culture has been instrumental in Alcoa’s success in delivering shareholder value that is sustainable in the long term.

Shareholder Alignment was supported and motivated by the strong equity mix in the compensation of the CEO and other Alcoa executives.

•

Alcoa’s one-year TSR (+49.8%) in 2014 outperformed the Standard & Poor’s (“S&P”) 500® Materials Index (+6.9%), the Dow Jones Industrial Average Index (“DJIA”) (+10%) and the average 2014 TSR of the Company’s competitor peers (+41.6%).

•

Alcoa’s three-year TSR (+89.2%) outperformed the three-year S&P 500® Materials Index (+54.4%), the three-year DJIA (+57.3%) and the average three-year TSR of the Company’s competitor peers (+22.5%).

•

Alcoa’s CEO alignment with shareholders is reinforced by the CEO’s pay mix: 89% is performance-based, and 65% is equity-based.

Pay-for-Performance incentivized management performance that contributed to strong 2014 operating, financial and TSR results.

•

Alcoa made major progress in achieving transformation goals in 2014. We augmented our value-add businesses with the acquisition of Firth Rixson, dramatically increasing our capability in the high-growth aircraft-engine sector. In our commodity businesses, we continued moving down the alumina cost curve and reduced high-cost smelting capacity by 549,000 metric tons in 2014, which has resulted in a 31% decrease in total smelting operating capacity since 2007.

•

Compared to 2013, Alcoa’s adjusted net income more than tripled and free cash flow* improved by $70 million.

•

Alcoa achieved productivity improvements of $1.2 billion in 2014 for a total of $7.9 billion over the past 6 years.

•

To drive management behavior that maximizes financial performance and value, Alcoa holds managers fully accountable for factors they can directly control. As a result, the Company makes incentive plan adjustments (normalization) for fluctuations in the price of primary aluminum on the London Metal Exchange (LME), for foreign currency exchange rates, and for certain unplanned events. In 2014, normalization and adjustments resulted in a substantial decrease in incentive compensation (IC) and long-term incentive (LTI) award payouts compared to the 2014 formula awards.

 

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Executive Compensation | Compensation Discussion and Analysis | Executive Summary (continued)

 

 

 

•

We set aggressive 2014 IC and LTI targets based on a forecast of higher costs and pension payments, lower regional premiums and the need to expand inventory to prepare for the ramp-up of our expanded automotive business. We exceeded those targets, contributing to an IC payout of 135.9% and an LTI payout of 136.2%.

•

The return on that over-achievement was significant. For every dollar in additional IC paid to management for above-target performance, Alcoa earned $45 of profit before tax and $36 of free cash flow.

Investor Outreach offered an opportunity to obtain investor comments and insights related to the investors’ policies and practices on compensation and governance matters as we developed the 2014 compensation plan.

•

We had compensation-related discussions during numerous meetings with investors, including 71 meetings and calls with governance and compensation investor professionals.

•

In this Compensation Discussion and Analysis, we discuss the actions we have undertaken as a result of counsel from our investors.

The remainder of this section reviews how:

 

A.

Alcoa’s Compensation Philosophy and Investor Outreach Guided the 2014 Executive Compensation Plan

 

B.

Alcoa’s Priority for Equity Pay-for-Performance has Produced Value for Shareholders

 

C.

Alcoa Made Significant Progress in Executing Its Transformation Strategy and Delivered Exceptional Operational and Financial Performance in 2014

 

D.

Alcoa Set Short- and Long-Term Business Plan Targets That, in Turn, Formed the Basis For Its IC and LTI Targets

 

E.

Alcoa Chose 2014 Metrics that Correlate to Shareholder Value and IC and LTI Targets That Drove Exceptional Performance

 

F.

The Compensation Committee Made IC and LTI Awards That Reflected the Strong Performance of 2014 and That Are Intended to Reward and Retain Exceptional Talent Who Delivered That Performance

See “Attachment C—Calculation of Financial Measures” for the reconciliations to the most directly comparable GAAP (accounting principles generally accepted in the United States of America) measures and management’s rationale for the non-GAAP financial measures used in this Compensation Discussion and Analysis, including adjusted income, adjusted EBITDA, free cash flow, days working capital and net debt.

 

*	For the reconciliation of free cash flow to the most directly comparable GAAP measure, cash from operations, see “Attachment C—Calculation of Financial Measures.”

 

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Executive Compensation | Compensation Discussion and Analysis | Compensation Design and Philosophy

 

 

 

Compensation Design and Philosophy

 

In 2014, Alcoa delivered another solid year of financial performance and business growth, marked by actions that are transforming the Company to deliver strong long-term, sustainable value to its shareholders. The market recognized this and our Company’s TSR increased 50% for the year. To sustain this strong performance over time, Alcoa designs its compensation system to motivate, reward and retain high-performing leaders and to closely align their incentives with the interests of shareholders.

 

A.	Alcoa’s Compensation Philosophy and Investor Outreach Guided the 2014 Executive Compensation Plan

Alcoa’s Executive Compensation Philosophy is based on four guiding principles to drive pay-for-performance and shareholder alignment:

 

1.

Make equity the most dominant portion of total compensation for senior executives and managers, increasing the portion of performance-based equity with the level of responsibility.

 

2.

Choose IC and LTI metrics that focus management’s actions on achieving the greatest positive impact on Alcoa’s financial performance.

 

3.

Set IC and LTI targets that challenge management to achieve continuous improvement in performance and deliver long-term growth.

 

4.

Target salary compensation at median, while using IC and LTI to reward exceptional performance and to attract and retain exceptional talent.

Our 2014 executive compensation plan reflects our continued investor outreach efforts. In passing our 2014 say-on-pay proposal with a 93% favorable vote, our investors reinforced their support of our compensation philosophy and plan. Alcoa conducted numerous investor meetings in 2013 and 2014, including 71 meetings with investor governance professionals. In developing the 2014 executive compensation plan and subsequent year-end compensation decisions, we considered feedback from these meetings and discussions in which our institutional investors discussed their priorities and policies with regard to executive compensation and governance topics. We gave consideration to the following areas where some investors provided counsel, and in most instances adopted changes in response:

•

In response to suggestions that we consider supplementing our Free Cash Flow (FCF) metric with additional IC financial metrics, we added a profit metric, which accounted for the largest portion (40%) of the 2014 IC target, and a Days Working Capital (DWC) metric. For details, see page 50.

•

Responding to requests by a few investors for more discussion of our LTI plan target-setting process, we have provided an expanded discussion about the target-setting process starting on page 47.

•

After some investors asked us to consider the performance period for the performance restricted share units, we undertook an extensive review and determined that the current practice of a three-year LTI plan with one-year performance periods best incentivizes the right behavior of management to drive shareholder value and performance. For further discussion, see page 47.

•

In response to comments of some investors in 2013 that the comparator peer group Alcoa used to help determine total direct compensation for the CEO was too broad, we developed a more focused peer group, which we disclosed in our 2014 proxy statement for use beginning in 2015. That new peer group consists of 20 Materials and Industrials companies that are more relevant and better aligned to Alcoa’s businesses. The companies are listed on page 53.

 

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Executive Compensation | Compensation Discussion and Analysis | Compensation Design and Philosophy (continued)

 

 

 

B.	Alcoa’s Priority For Equity Pay-For-Performance Has Produced Value For Shareholders

 

 

The 2014 total compensation for the other named executive officers covered in this document also had a strong emphasis on equity:

 

Type of Compensation		% of Target     Compensation
Salary		16% to 18%
Annual Cash Incentive Compensation		25% to 30%
Performance shares (representing 80% of LTI granted and vested after three years)		43% to 47%
Stock Options (representing 20% of LTI granted and vesting over three years)		11% to 13%

The focus on equity pay-for-performance is achieving shareholder alignment. As the following charts demonstrate, Alcoa’s financial performance and transformation progress had a dramatic impact on the return to our shareholders in 2014 as well as on a three-year basis. For a one-year period, Alcoa has performed better than its competitor index and major market indices. Over three years, Alcoa has shown significant value creation above all comparator indices.

Alcoa’s one-year TSR outperformed the DJIA and S&P indices as well as its competitor peers

 

One-year TSR through December 31, 2014

 

 

1	Aluminum peers: Aluminum Corporation of China Limited, United Company RUSAL, Norsk Hydro ASA, Alumina Limited, National Aluminium Company Limited and Shandong Nanshan Aluminum Co., Ltd.

2	Competitor peers: Aluminum peers plus Precision Castparts Corp., Kaiser Aluminum Corporation, Accuride Corporation, Constellium N.V.

 

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Alcoa’s three-year TSR outperformed the DJIA and S&P indices as well as its aluminum and competitor peers

Three-year TSR through December 31, 2014

 

 

1	Aluminum peers: Aluminum Corporation of China Limited, United Company RUSAL, Norsk Hydro ASA, Alumina Limited, National Aluminum Company Limited and Shandong Nanshan Aluminum Co., Ltd.

2	Competitor peers: Aluminum peers plus Precision Castparts Corp., Kaiser Aluminum Corporation, Accuride Corporation, Constellium N.V.*

*	Constellium N.V. was not publicly traded until mid-2013, so its trading is reflected only for the 2014 calendar year

 

C.	Alcoa Made Significant Progress in Executing its Transformation Strategy and Delivered Exceptional Operational And Financial Performance in 2014

In 2014, Alcoa accelerated the transformation of its value-add and commodity portfolios. Alcoa’s resolution of a long-standing legacy issue in early 2014 enabled management to accelerate implementation of its transformation strategy. In support of Alcoa’s goal to grow its value-add portfolio, we acquired Firth Rixson (completed in November 2014) and Tital (completed in March 2015), two global leaders within the jet-engine components industry. In addition to more than doubling Alcoa content on key new generation jet-engine programs, these acquisitions expand Alcoa’s multi-material portfolio and add growth capabilities in an aerospace market that is predicted to grow at an annual compounded rate of 5-6% through the next five years. As described in the discussion of our Global Primary Products business below, Alcoa also made significant progress in restructuring its Alumina and Primary Metals segments to achieve its goal of creating a globally competitive commodity portfolio.

Each of Alcoa’s business groups delivered strong performance in 2014.

•

Our Engineered Products and Solutions segment increased after-tax operating income by 6% from $726 million in 2013 to $767 million in 2014, and adjusted EBITDA* margins continued to grow from a historic high of 21.5% in 2013 to 21.9% in 2014. The continued focus on innovation and share gains delivered $192 million, excluding acquisitions, of incremental revenue in 2014.

•

Our Global Rolled Products segment, although impacted by the decline in the packaging sector, delivered adjusted EBITDA* per metric ton (MT) of $339 in 2014, exceeding the previous historical average (2001-2010) of $233 and comparable to the current historical average (2010-2012) of $344. This segment has demonstrated a focus on profitable growth by generating incremental revenue of $245 million in 2014 and has prepared for the explosive growth in the automotive sector by completing a major expansion of its Davenport, Iowa facility.

 

*	For the reconciliation of the segments’ adjusted EBITDA to the most directly comparable GAAP measure, after-tax operating income, see “Attachment C—Calculation of Financial Measures.”

 

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Engineered Products and Solutions Adjusted EBITDA Margin %		Global Rolled Products Adjusted EBITDA/MT

 

•

In our Global Primary Products business, we took decisive actions in 2014 toward the goal of moving our Alumina and Primary Metals segments down their respective cost curves. With the reduction of 549,000 metric tons of high-cost smelting capacity in 2014, we have lowered our total production capacity by 31% since 2007 through divestitures, curtailments and closures of our highest-cost assets. While delivering significant productivity improvements in its remaining smelting operations, the business also benefitted from higher regional premiums as market forces, such as supply and demand, increased the realized price of aluminum in regional markets. We continued to de-link alumina pricing from the London Metal Exchange (LME) price by expanding the use of the Alumina Price Index (API) to sell smelter-grade alumina at prices that represent alumina market fundamentals rather than LME-linked alumina pricing. In 2014, 68% of total third-party smelter-grade alumina sales were based on API/spot market pricing, up from 55% in 2013. Continuing our emphasis on value-add products in our Primary Metals segment, 65% of total 2014 shipments were differentiated, value-add products cast in forms customized for the needs of customers, a five-point increase over 2013.

 

 

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As a result of the operational and financial performance of Alcoa’s businesses, earnings excluding special items more than tripled in 2014. The following bridge shows 2013 adjusted net income* at $357 million rising in 2014 to $1,116 million, primarily driven by performance of $1,113 million that overcame $461 million in cost headwinds:

Earnings Rise Year-over-Year

(Net Income Excluding Special Items)

 

 

 

*	For the reconciliation of adjusted net income to the most directly comparable GAAP measure, net income/(loss), see “Attachment C—Calculation of Financial Measures.”

Performance improvements and disciplined capital management drove strong cash flow generation. In 2014, the Company achieved its cash sustainability targets for the sixth straight year and delivered on its FCF target, generating positive FCF of $455 million (cash from operations of $1,674 million).

•

In 2014, Alcoa’s productivity gains consisted of $657 million from procurement savings, $415 million from process improvements and labor productivity and $122 million from reductions in overhead spend. Alcoa has been able to achieve consistently high productivity cost savings through our Degrees of Implementation system, which facilitates the creation, deployment and tracking of savings ideas throughout the organization. In 2014, about 15,000 ideas contributed to gross productivity savings of $1.2 billion, resulting in $757 million of after-tax and after non-controlling interest productivity savings that dropped to the bottom line of net income, as reflected in the bridge above.

•

We took a disciplined approach to capital investment, aggressively managing sustaining capital while investing in the value-add businesses. The combined capital spend for 2014 was consistent with our target of $1.25 billion.

•

As construction of our Saudi Arabia joint venture nears completion, the project is well within budget and on schedule.

The Company’s FCF improved $70 million and average year-to-date DWC* held steady at 30 days compared to 2013, despite significant portfolio changes that increased the portion of businesses with higher inventory requirements. The DWC metric has declined by 17 days compared to 2009. At the end of 2014, the Company had $1.9 billion cash on hand.

 

*	For the reconciliation of days working capital to the most directly comparable GAAP measure, see “Attachment C—Calculation of Financial Measures.”

 

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Productivity Savings		Average Year-to-Date DWC
*   All figures are pretax and pre-minority interest. 2009-2010 represent net productivity; 2011-2014 represent gross productivity. ** Represents the Alumina and Primary Metals segments combined.

Cash, Debt and Net Debt* Position

 

 

 

*	For the reconciliation of net debt to the most directly comparable GAAP measure, total debt, see “Attachment C—Calculation of Financial Measures.”

 

D.	Alcoa Set Short- and Long-Term Business Plan Targets That, In Turn, Formed The Basis For Its IC and LTI Targets

Supporting the IC and LTI targets that Alcoa sets each year is a comprehensive approach for establishing business plan targets, which are publicly disclosed. The business plan targets are consistent with Alcoa’s overall strategy to build a globally competitive commodity business while profitably growing our value-add businesses.

In 2010, the Company began the process of setting three-year targets. In January 2014, the Company initiated the second set of three-year targets to be reached in 2016. (Alcoa does not set new three-year targets each year.) Because of the diversity of our businesses, these three-year targets have taken varying forms for the upstream, midstream and downstream businesses. For example, because the upstream business largely competes in commodity markets, the focus has been on lowering costs, and the targets are set to lower Alcoa’s position on the industry cost curves by the year in which the targets end. In the midstream and downstream businesses, targets for

 

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profitable growth are established, including a profitability target (adjusted EBITDA/MT in the midstream and adjusted EBITDA Margin Percentage in the downstream) and a revenue growth target. The three-year targets are set with the following parameters considered:

1.

Market/competitive positioning, both current and projected;

2.

Competitor financial benchmarking;

3.

Market conditions, both current and projected; and

4.

Historical performance.

Annually, the Company conducts a rigorous, iterative operational planning process that, due to the differences among the businesses, considers a series of factors:

1.

Progress toward attainment of three-year targets;

2.

Current and projected market conditions, which are based on assumptions about key financial parameters, such as foreign currency exchange rates (“FX”) and prices of metal, energy and raw materials;

3.

Capital and operational projects to be completed during the year that increase our competitiveness, open new markets or drive additional profitability; and

4.

Historical performance and each business’ ability to overcome headwinds through ongoing productivity improvements.

Each business plan is evaluated using a number of financial and non-financial metrics, including revenue growth, gross and net productivity, overhead expenditures, capital efficiency (both working capital and capital expenditures), overall profitability, cash generation (both cash from operations and FCF), safety, quality and customer metrics.

The summation of these group plans then is compared with the financial position of the Company in aggregate to determine whether the targets meet our financial ratio and cash requirements. The final result is the annual Alcoa Business Plan.

This rigorous process allows Alcoa to establish one-year and three-year business plan goals on which to base its IC and LTI targets. The LTI target is structured so that the Company can monitor and incentivize progress each year of the three-year plan, an important consideration given the volatility of the pricing of the aluminum commodity and of overall business conditions.

The consistent progress toward achieving the three-year business plan goals demonstrates that the annual business plans on which the IC and LTI targets are based consistently drive long-term value for Alcoa’s shareholders. The tangible evidence of this can be found in the multi-year productivity gains, reductions in days working capital and increases in profitable growth, which have facilitated the Company’s transformation strategy, detailed in “C. Alcoa Made Significant Progress in Executing its Transformation Strategy and Delivered Exceptional Operational and Financial Performance in 2014,” above at page 44.

 

E.	Alcoa Chose 2014 Metrics That Correlate to Shareholder Value and IC and LTI Targets That Drove Exceptional Performance

Our choice of metrics is directly related to the major priorities of our businesses and is aligned with our shareholders.

•

Financial metrics represent 80% of the total IC and 100% of the LTI targets. Alcoa has consistently chosen IC metrics that motivate high performance in the current environment and LTI metrics that are aligned with its long-term strategy. Since liquidity became the major concern for Alcoa during the economic downturn, FCF was a major financial IC metric since 2009. While this IC metric addressed immediate cash requirements, Alcoa continued to apply LTI metrics, consisting of 75% for EBITDA margin growth and 25% for revenue growth, to reinforce its long-term objective of profitable growth in our value-add businesses.

•

Changes in IC financial metrics in 2014 reflect the shift to profitable growth. Recognizing improvement in the Company’s liquidity and the opportunity to respond to investor interest in profitable growth, in 2014, Alcoa added a 40% IC metric for after-tax earnings. This shift directly aligns with investor feedback and shareholder value. The FCF metric was reduced from 80% to 33% to accommodate this shift in emphasis toward profitable growth. However, a separate metric was added, namely Average Year-to-Date DWC, for 7%. By creating this separate DWC metric, Alcoa will drive continual improvement in the practices that have allowed the Company to achieve historically low levels of DWC since the economic downturn by managing working capital down

 

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through the entirety of the year. This, in turn, is expected to lower financing costs. Taken as a whole, these changes to the metrics maintain the Company’s focus on generating FCF and efficient use of capital (40% total for FCF and DWC) while providing new emphasis on profitable growth (40%).

•

Non-financial metrics represent 20% of the IC target. Safety, environmental stewardship and diversity are intrinsic to Alcoa’s values and have an impact on Alcoa’s business performance. The safety metric focuses on reducing the number of serious injuries. Our environmental metric drives reduction of carbon dioxide emissions, strengthening Alcoa’s energy efficiency. Our diversity metric tracks representation of women globally and minorities in the United States, reinforcing our goal to draw on every talent pool to attract the best and brightest to Alcoa and to build on diverse viewpoints.

To drive management behavior that maximizes financial performance and value, Alcoa holds managers fully accountable for factors they can directly control. Because Alcoa’s compensation philosophy is not to reward or punish management for factors that are outside their control, we normalize for those factors. As part of the financial planning process for an upcoming year, we establish assumptions for the LME price of aluminum and FX, both of which can have significant effects on financial results and neither of which management performance can impact. Without normalization, in years when the LME rises, IC and LTI would be less effective as a performance incentive because management would receive an unearned benefit. In recent years, when the LME price of aluminum fell dramatically, failure to normalize could have de-motivated employees by putting any IC and LTI awards out of reach for reasons beyond their control. Instead, Alcoa’s use of normalization enabled the Company to drive operational and financial performance, particularly in recent years of volatile LME aluminum prices. While normalization reinforces management accountability and pay-for-performance, the significant equity portion of executive compensation reinforces management’s alignment with our shareholders’ experience as investors in the Company.

Since Alcoa’s revenues are largely U.S. dollar-denominated, while costs in non-U.S. locations are largely denominated in local currency, the volatility of FX also has had a significant impact on Alcoa’s upstream earnings. As our commodities are traded in U.S. dollars, we have typically seen an inverse correlation to FX. Therefore, to avoid double counting, the normalization for the commodity price swings needs to be corrected by concurrent normalization of FX. Because Alcoa generally does not hedge FX or LME fluctuations, normalization is a practice that Alcoa has been following for many years. As a result, our management has remained highly focused on achieving and surpassing operational and strategic goals that benefit our top- and bottom-line performance. Discussion of the application of normalization and other adjustments to the 2014 results is presented below on page 51 in the section entitled “F. The Compensation Committee Made IC and LTI Awards That Reflected the Strong Performance of 2014 and That Are Intended to Reward and Retain Exceptional Talent Who Delivered That Performance.”

Alcoa set 2014 financial targets that drive long-term shareholder value. As described on page 47, Alcoa has a rigorous process to develop the financial targets on which it bases its IC and LTI targets. Given the impact of a variety of external factors affecting Alcoa’s financial performance, the target-setting process must take into account the complexities of the business and the multiple external factors that impact it. As the Company has successfully addressed the challenging situation facing the aluminum industry during the past six years, its incentive targets have played a major role in driving Alcoa’s year-over-year improvements in underlying operational fundamentals and financial performance. The 2014 IC and LTI financial targets were established to continue that progress. Following the review of Alcoa’s 2014 financial plan by the Board of Directors in January 2014, the Compensation Committee approved the metrics and targets after assessing the relevancy of the metrics to Alcoa’s strategy and value creation and the difficulty and appropriateness of the targets to drive performance.

Comparison of 2014 incentive targets to 2013 targets and results. As discussed above, in its compensation plan, Alcoa normalizes for the impact of fluctuations in the LME price of aluminum and FX due to the volatility and magnitude of their effect on key metrics. To provide comparability across years of the financial targets and results, underlying LME aluminum price and FX assumptions need to be consistent in the comparison years.

The 2013 targets as reported in the 2014 proxy statement were set in January 2013 based on LME and FX assumptions in the 2013 financial plan. The 2013 results were also normalized to the 2013 plan assumptions. To compare the 2014 targets to the 2013 targets and results, as presented in the table below, we have normalized the 2013 targets and results to the LME and FX assumptions in the 2014 financial plan.

 

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It is important to remember that the plan assumptions for LME and FX do not make the targets harder or easier because the results are normalized back to the plan assumptions. Whether actual LME or FX exceed or fall short of plan assumptions utilized in setting targets, those impacts are normalized out of the results in the compensation plan. In 2014, when actual LME or FX differed substantially from plan assumptions, that impact was normalized out of the result, lowering it for purposes of IC and LTI awards. See “F. The Compensation Committee Made IC and LTI Awards That Reflected the Strong Performance of 2014 and That Are Intended To Reward and Retain Exceptional Talent Who Delivered That Performance” on page 51.

 

		Annual Incentive Metrics															Long-Term Incentive Metrics
		Adjusted Free         Cash Flow1					Adjusted Net Income2					Average         YTD DWC					Revenue Growth					Adjusted EBITDA Margin2
2013 Target
As reported in 2014 Proxy Statement			-$	123M															2.6	%				12.0	%
Normalized for 2014 Plan LME/FX			-$	395M					N/A					N/A					2.7	%				9.4	%
2013 Result
As reported in 2014 Proxy Statement			$	455M					N/A					N/A					1.9	%				13.7	%
Normalized for 2014 Plan LME/FX			$	184M					$316M					29.9					2.2	%				11.4	%
2014 Target3			-$	210M					$317M					28.9					2.7	%				11.6	%

1	Includes Saudi Arabia joint venture investment. For definition of Adjusted Free Cash Flow and the reconciliation to the most directly comparable GAAP measure, cash from operations, see “Attachment C—Calculation of Financial Measures.”

2	For definition of Adjusted Net Income and Adjusted EBITDA and the reconciliation to the most directly comparable GAAP measure, net income/(loss), see “Attachment C—Calculation of Financial Measures.”

3	Adjusted Net Income and Average YTD DWC were new metrics in 2014

The annual targets for the IC and LTI metrics interact with Alcoa’s 3-year business plan. The targets take into account the three-year targets for the businesses and market conditions, as described under “D. Alcoa Set Short- and Long-Term Business Plan Targets That, In Turn, Formed the Basis For Its IC and LTI Targets” on page 47.

•

The 2014 Adjusted Free Cash Flow target was set above the 2013 target and was also more challenging than the 2013 result when taking into account three extraordinary circumstances:

1.

Growth. We planned an increase in working capital to build for the increased use of aluminum in the U.S. automotive industry. In 2014, Alcoa ramped up rolling-mill stocks to support the launch of the new aluminum-intensive Ford F-150, which is reportedly the highest-selling vehicle in the United States for over 30 years. In addition, certain of our businesses in the Engineered Products and Solutions Segment planned to build working capital to support the growth in the aerospace industry.

2.

Pension. Due to curtailment of some of our high-cost facilities and a lower U.S. discount rate, we planned for higher pension-funding requirements.

3.

Legacy Resolution. Our 2014 target anticipated a settlement payment to the U.S. government for a legacy issue.

Excluding these extraordinary circumstances, the 2014 target would have slightly exceeded the 2013 result of $184 million. In fact, the 2014 FCF target was a stretch in light of projected lower aluminum regional premiums, higher energy costs and expected cash outflows associated with the extraordinary items described above. Largely driven by the out-performance in adjusted net income (due to the factors listed in the following section) and partially offset by cash used to support higher working-capital requirements, management overachieved this target in 2014. With management’s recommendation and Compensation Committee approval, the benefit of lower actual cash requirements due to pension relief enacted in 2014 (under the Highway and Transportation Funding Act) was eliminated for IC award purposes.

•

The 2014 Adjusted Net Income target, a new metric in 2014, was flat to the 2013 result despite expectations of lower regional premiums and higher energy, raw materials and other costs. To maintain 2013 levels, the plan required management to achieve significant improvements in sales volume and productivity. Although most industry analysts forecasted regional premiums to decline in 2014, they increased. Alcoa’s energy and other costs did in fact increase in 2014, but were offset by productivity improvements that far exceeded expectations as Alcoans delivered $1.2 billion in pre-tax productivity gains against a goal of $850 million.

 

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•

The 2014 Average Year-to-Date DWC target, new in 2014, was highly aggressive relative to the 2014 financial plan to increase management’s focus on this important metric to help drive FCF. The target was set as an improvement of one day of working capital compared to the 2013 actual result, which was a record low. Due to the aggressiveness of the target and previously discussed higher inventory requirements as the portfolio shifted toward high-growth, value-add businesses, the Company missed the DWC target, and this metric did not contribute to the 2014 IC payout. Nonetheless, the 2014 result was in line with the record low 2013 result.

•

The 2014 Revenue Growth target was set above the result achieved in 2013. This target was especially challenging given the revenue headwinds associated with the curtailment of facilities in the upstream business and the projected lower revenue associated with expected lower regional premiums. Driven by the growth of our value-add businesses and strong achievement by the Alumina and Primary Metals segments, this target was met in 2014, with 100.8% attainment.

•

The 2014 Adjusted EBITDA Margin target represents an improvement over both the 2013 target and 2013 result (when both are normalized to the 2014 plan), especially in light of the planned headwinds discussed in the adjusted net income section above. This target was exceeded in 2014 with 148% attainment largely due to higher-than-planned levels of productivity and energy sales.

In addition to setting challenging targets, Alcoa sets thresholds and maximums to motivate high performance. To disincentivize below-target performance, we set thresholds that eliminate payouts for missing targets by more than a small margin. While the reduced payout slope from target to minimum is steep, we establish payout multiples for over-achievement that can be earned only with significant upside performance. The positive payout multiples are aligned with achievement levels that ensure a strong return on the additional incentive compensation paid (see page 44 for 2014 results). Given restrictions on base salary increases to control overhead expenses and the demanding leadership challenges confronting the aluminum industry in recent years, the prospect of an upside in IC has proven to be a major retention factor and has had a demonstrable impact on motivating managers to achieve continued productivity improvements and overcome the obstacles associated with accelerating Alcoa’s transformation.

 

F.	The Compensation Committee Made IC and LTI Awards That Reflected the Strong Performance of 2014 and That Are Intended to Reward and Retain Exceptional Talent Who Delivered That Performance

In 2014, Alcoa out-performed its financial and incentive targets. As described starting on page 44, management achieved strong operational and financial performance and transformation progress in 2014. As a result of that performance and after addressing adjustments, the Compensation Committee approved a 135.9% payout against the annual financial and non-financial IC targets and a 136.2% payout against the LTI targets for the first year of our 2014 three-year performance share awards. For every dollar in additional IC paid to management for above-target performance, Alcoa earned $45 of profit before tax and $36 of free cash flow.

 

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In determining the IC and LTI payouts, the Committee applied the principles of normalization, described above on page 49, and also approved certain adjustments recommended by management for items or assumptions not anticipated in the plan. For 2014, on a net basis, the normalizations and adjustments reduced IC awards by 27.9% points and LTI awards by 51.2% points compared to formula results before the normalizations and adjustments. Following are the normalizations and adjustments to the 2014 financial results for incentive purposes:

 

		Annual Incentive Metrics* ($M)								Long-Term Incentive Metrics ($M)
		Adjusted Free Cash Flow**				Adjusted Net Income***				Revenue				Adjusted EBITDA***
Preliminary Result			$363				$1,116				$23,906				$3,556
Normalizations & Adjustments
1. LME & FX1			($192)				($188)				($246)				($281)
2. Premiums2			($216)				($238)				($395)				($349)
3. Special items3			$198				($63)				$162				$128
4. Pension relief4			($100)				N/A				N/A				N/A
5. Deferred equity contribution5			($32)				N/A				N/A				N/A
Final Result			$21				$627				$23,427				$3,054

*	Average year-to-date DWC is not included in this table because normalizations and adjustments do not impact it

**	Includes Saudi Arabia joint venture investment. For definition of Adjusted Free Cash Flow and the reconciliation to the most directly comparable GAAP measure, cash from operations, see “Attachment C—Calculation of Financial Measures.”

***	For definition of Adjusted Net Income and Adjusted EBITDA and the reconciliation to the most directly comparable GAAP measure, net income/(loss), see “Attachment C—Calculation of Financial Measures.”

1	The impact of the LME and FX fluctuations in 2014 against plan was a benefit to the Company’s financial results. Under the practice described above on page 49, there was a negative normalization applied to results for each of the four metrics.

2	Because realized aluminum premiums came in well above plan assumptions, management recommended, and the Compensation Committee approved, a negative adjustment to all four metrics.

3	Management recommended, and the Compensation Committee approved, adjustments for certain special items. For details, see “Attachment C—Calculation of Financial Measures.”

4	The Company received unplanned pension relief in 2014 under the Highway and Transportation Funding Act, which was adjusted out of the FCF results. This pension relief had no impact on the results of the other three metrics.

5	The Company deferred some Saudi Arabia joint venture equity contributions in 2014, which were adjusted out of the FCF results. The deferred contributions had no impact on the results for the other three metrics.

In determining these normalizations and other adjustments, the Compensation Committee made every effort to assure that the incentives are designed to motivate management to maximize performance on factors they can control and that IC and LTI payouts are adjusted—up and down—for uncontrolled and unplanned impacts, such as LME and FX changes. In doing so, the Committee maintained its focus on incentivizing and rewarding exceptional performance that delivers value to Alcoa’s shareholders over time.

In summary, the fundamentals of Alcoa’s executive compensation policies incentivize performance while maintaining alignment with shareholder interests. In 2014, Alcoa’s consistent financial and operational performance amidst unpredictable market forces and the increasing impact of its transformation were major factors in the strong performance of Alcoa’s 2014 and three-year stock price compared to the performance of the Dow Jones Industrial Average, the Standard & Poor’s 500^® Materials Index and Alcoa’s competitors. The 2014 incentive awards, combining a mix of short- and long-term performance incentives, validated the effectiveness of Alcoa’s executive compensation design in ensuring pay-for-performance and shareholder alignment.

 

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Analysis of 2014 Compensation Decisions

 

The Compensation Committee uses its business judgment to determine the appropriate compensation targets and awards for the named executive officers, in addition to assessing several factors that include:

•

Individual, Group, and Corporate performance;

•

Market positioning based on peer group data (described below);

•

Complexity and importance of the role and responsibilities; and

•

Leadership and growth potential.

Comparator Peer Groups

For 2014, we developed a more focused peer group to help determine total direct compensation for the CEO. The new peer group consists of 10 Materials and 10 Industrials companies that are relevant to and aligned with Alcoa’s upstream (materials) and mid/downstream (industrials) businesses. We plan to use this peer group going forward to achieve greater consistency of year-to-year compensation data, as disclosed in proxy statements, than could be attained utilizing the previous peer group based on Towers Watson’s broad-based survey. Pay Governance, the Compensation Committee’s independent compensation consultant, has reviewed and endorses this peer group. The companies in the CEO peer group are:

 

Materials Companies		Industrials Companies
•       Dow Chemical •       DuPont •      Freeport McMoran •      Huntsman •       International Paper •       LyondellBasell •       PPG •      Newmont Mining •      Nucor •       United States Steel		•       3M •       Cummins •       Danaher •       Deere •       Eaton •       Emerson •       General Dynamics •      L-3 Communications •       Northrop Grumman •       Raytheon

For other executive level positions, we continued to use Towers Watson survey data for companies with revenues between $15 billion and $50 billion (excluding financial companies) to help estimate competitive compensation. We continued to use this peer group because it reflects the broad-based group of companies with which we compete for non-CEO executive talent, and the data for such positions is more robust within published surveys such as the Towers Watson survey. The Compensation Committee’s independent compensation consultant has reviewed and endorses this peer group. For 2014, 114 companies met the revenue and industry criteria and were used to compare compensation for all of the executive level positions, except the CEO position, see “Attachment B” on page 77.

The data from each of these peer groups described above is considered in establishing executive compensation and to ensure that Alcoa provides and maintains compensation levels in line with the market, including similar companies, and to attract, retain and motivate employees.

Performance-Based Pay Decisions

Chairman and Chief Executive Officer—Mr. Kleinfeld. In January 2014, the Compensation Committee awarded Mr. Kleinfeld performance share awards and stock options with a total grant-date value of $8,700,069, which is in line with the market median of the CEO peer group, as described above. Eighty percent of the award ($6,960,058) was granted as performance stock awards, and 20% of the award ($1,740,011) was granted as stock options. In making this decision, the Compensation Committee considered the operational performance of the Company in 2013, the performance of the Company’s stock during 2013, and the median level of equity as reported for the CEO peer group. Mr. Kleinfeld’s annual incentive compensation award for 2014 of $3,228,984 was above the target award due to the incentive compensation plan result and his strong performance review for 2014. The award was based on the corporate incentive compensation plan result of 135.9%, as described on page 51, and an individual multiplier of 110%. The Compensation Committee’s decision to award an individual multiplier was based on Mr. Kleinfeld’s

 

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extraordinary strategic leadership of the Company’s continuing transformation from a commodity-focused to a combined value-add and globally-competitive commodity enterprise while, at the same time, driving year-over-year operational performance in an extremely challenging environment. In determining the individual multiplier, the Compensation Committee also considered the relative competitiveness of the CEO package and the mix of equity and cash incentives.

Executive Vice President and Chief Financial Officer—Mr. Oplinger. In January 2014, Mr. Oplinger was granted performance stock awards valued at $1,288,037 and stock options valued at $322,028, which was above the target award due to his strong performance in 2013, which was his first year as Chief Financial Officer. Mr. Oplinger’s annual incentive compensation award for 2014 of $849,375 was above the target award due to the incentive compensation plan result and his strong performance review for 2014. The award was based on the corporate incentive compensation plan result of 135.9%, as described on page 51, and an individual multiplier of 125%. Mr. Oplinger received an 11% salary increase effective January 1, 2014 based on his performance in his new role and to bring his salary closer to the median of the peer group.

Executive Vice President and Group President, Engineered Products and Solutions—Mr. Jarrault. In January 2014, Mr. Jarrault was granted performance stock awards valued at $1,600,027 and stock options valued at $400,014, which was above the target award based on his strong performance review in 2013. Mr. Jarrault’s annual incentive compensation award for 2014 of $845,625 was above the target award due to the incentive compensation plan result and his strong performance review for 2014. The award was based 50% on the corporate incentive compensation plan result of 135.9%, as described on page 51, 50% on the incentive compensation plan results for the Engineered Products and Solutions (EPS) group, which he leads, and an individual multiplier of 125%. The EPS group’s incentive compensation plan for 2014 had a similar design as the corporate plan and similar financial metrics, except that the EPS IC plan also contained a revenue growth metric designed to incent growth in the value-add businesses. The EPS group’s incentive compensation plan result for 2014 was 110% based on the group’s strong contribution to the overall corporate results (see “Engineered Products and Solutions” discussion on page 44) and the Compensation Committee’s exercise of discretion to increase the result from 58.3% in recognition of the difficulty of the group’s targets in 2014 and its disciplined execution in improving its financial performance year-over-year, while successfully working to acquire Firth Rixson and execute the initial phases of the post-merger integration. Mr. Jarrault received a 10% salary increase effective January 1, 2014 based on his performance and to bring his salary closer to the median of the peer group.

Executive Vice President, Chief Legal Officer and Secretary—Ms. Strauss. In January 2014, Ms. Strauss was granted performance stock awards valued at $1,408,042 and stock options valued at $352,018, which was above the target award due to her strong performance review in 2013. Ms. Strauss’ annual incentive compensation award for 2014 of $844,618 was above the target award due to the incentive compensation plan result and her strong performance review for 2014. The award was based on the corporate incentive compensation plan result of 135.9%, as described on page 51, and an individual multiplier of 110%.

Executive Vice President and Group President, Global Primary Products—Mr. Wilt. In January 2014, Mr. Wilt was granted performance stock awards valued at $1,232,064 and stock options valued at $308,026, which was above the target award based on his strong performance review in 2013. Mr. Wilt’s annual incentive compensation award for 2014 of $880,663 was above the target award due to the incentive compensation plan result and his strong performance in 2014, his first year as a Group President. The award was based 50% on the corporate incentive compensation plan result of 135.9%, as described on page 51, 50% on the incentive compensation plan results for the Global Primary Products (GPP) group, which he leads, and an individual multiplier of 125%. The GPP group’s incentive compensation plan for 2014 had the same design as the corporate plan and similar financial metrics. The GPP group’s incentive compensation plan result for 2014 was 163.8% based on the group’s strong contribution to the overall corporate results (see “Global Primary Products” discussion on page 45). Mr. Wilt received an 18% salary increase effective January 1, 2014 based on his performance in his new role and to bring his salary closer to the median of the peer group.

 

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Executive Compensation | Compensation Discussion and Analysis | 2014 Annual Cash Incentive Compensation

 

 

 

2014 Annual Cash Incentive Compensation

 

The corporate annual cash incentive compensation plan for 2014 was designed to achieve operating goals set at the beginning of the year.

•

80% of the cash incentive formula was based on achieving financial targets for adjusted free cash flow (33%), adjusted net income (40%) and average year-to-date DWC (7%); and

•

20% of the formula was based on achieving safety, environmental and diversity targets.

The formula award at the corporate level reflected a 135.9% achievement against these financial and non-financial goals. After establishing the targets for the financial measures, the payout ranges were set above and below the target as shown in the table below:

•

The steep curve to achieve 100% performance is intended to drive maximum effort.

•

The payouts above target are aligned with achievement levels that ensure a strong return on the additional incentive compensation paid.

•

We believe this design helped drive our employees to exceed our performance goals in 2014.

2014 Annual Cash Incentive Compensation Plan Design, Targets and Results

 

				Defined Corporate Level Payout Percentage
Metric				0%				50%				100% (Target)				150%				200%				Result				IC Result				Weighting				Formula Awlard
($ in millions)
Financial Measures1		Adjusted Free Cash Flow
					$(500)				$(350)				$(210)				$337				$1,094				$21				121%				33%				40.0%
		Adjusted Net Income
					$(35)				$141				$317				$493				$669				$627				188%				40%				75.2%
		Average Year-to-Date DWC
					29.9				29.4				28.9				27.9				26.9				30.2				0%				7%				0%
																																					115.2%
Non- Financial Measures		Safety2
		DART							0.340				0.332								0.323				0.320				200%				5%				5.0%	2
		Environment3
		CO2 metric tons reduction							181,000				300,000								454,000				362,800				141%				5%				7.0%
		Diversity4
		Executive level women, global							21.0%				21.3%								22.3%				21.8%				150%				2.5%				3.7%
		Executive level minorities, U.S.							15.8%				16.1%								17.1%				16.4%				130%				2.5%				3.3%
		Professional level women, global							26.4%				26.7%								27.7%				26.5%				67%				2.5%				1.7%
		Professional level minorities, U.S.							18.2%				18.5%								19.5%				18.1%				0%				2.5%				0%
																																					8.7%
TOTAL																																	100%				135.9%

Foreign currency exchange rates and the price of aluminum on the LME were normalized to plan rates and prices to eliminate the effects of fluctuation in such rates and prices, both of which are factors outside management’s control. See “Attachment C—Calculation of Financial Measures” for calculation of financial measures and for the definition of Adjusted Free Cash Flow and Adjusted Net Income. The threshold payout is 0% for the financial metrics and 50% for the non-financial metrics. The maximum payout for each metric is 200%. For performance between defined levels, the payout is interpolated.

1	80% of the cash incentive formula was based on achieving financial targets for adjusted free cash flow, adjusted net income and average year-to-date DWC. We achieved a payout of 115.2% for financial metrics in 2014. For more information on the target setting for the financial metrics, see page 48.

 

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2

Safety targets included a reduction in the DART (Days Away, Restricted and Transfer) rate, which measures injuries and illnesses that involve one or more days away from work per 100 full-time workers and days in which work is restricted or employees are transferred to another job due to injury per 100 full-time workers. Performance against this metric exceeded the maximum, but the payout was reduced by 50% because of a work-related fatality during the year.

3	The environmental target highlights our commitment to reduce CO2 emissions in 2014 and make progress against our 2030 environmental goals. Performance against this metric was 141% of target in 2014.

4

Diversity targets were established to increase the representation of executive and professional women on a global basis and to increase the representation of minority executives and professionals in the United States. In 2014, we exceeded the representation targets at the executive level but fell short of the targets at the professional level.

Calculation of Annual Cash Incentive Compensation for Each Named Executive Officer. The calculation of annual cash incentive compensation awards for the named executive officers is shown in the following table and described below.

 

Officer		Target Award ($)				Plan Payout (%)				Individual Performance  Multiplier (%)		Formula  Award ($)
Klaus Kleinfeld		$	2,160,000				135.9%			110%		$	3,228,984
William F. Oplinger		$	500,000				135.9%			125%		$	849,375
Olivier M. Jarrault		$	550,000				123.0%			125%		$	845,625
Audrey Strauss		$	565,000				135.9%			110%		$	844,618
Robert G. Wilt		$	470,000				149.9%			125%		$	880,663

Target Award: Mr. Kleinfeld’s 2014 target award was calculated at 150% of his salary, and the other named executive officers’ awards were targeted at 100% of their salaries.

Plan Payout: Mr. Kleinfeld’s, Mr. Oplinger’s and Ms. Strauss’ respective plan payouts were based 100% on corporate performance; the plan payout for Mr. Jarrault was based 50% on corporate performance and 50% on the Engineered Products and Solutions group performance; and the plan payout for Mr. Wilt was based 50% on corporate performance and 50% on the Global Primary Products group performance.

Individual Performance Multiplier: All of the named executive officers received above-target multipliers based on strong performance reviews in 2014.

Formula Award is the product of the target award, the plan payout, and the individual multiplier.

2014 Equity Awards: Stock Options and Performance-Based Restricted Share Units

 

Long-term stock incentives are performance-based. We grant long-term stock awards to align executives’ interests with those of shareholders, link compensation to stock price appreciation over a multi-year period and support the retention of our management team. In January 2014, stock awards were made to all the named executive officers.

We provide two types of annual equity awards to the named executive officers:

•

20% of the value of equity awards for each of our named executive officers is granted in the form of stock options. We believe that stock options further align management’s interests with those of our shareholders because the options have no value unless the stock price increases. Stock options vest ratably over a three-year period (one-third vests each year on the anniversary of the grant date) and if unexercised, will expire the earlier of ten years from the date of grant or five years after retirement.

•

80% of the value of equity awards for each of our named executive officers is granted in the form of performance-based restricted share units. Performance is measured as the three-year average achievement against annual targets for revenue growth and adjusted EBITDA margin. As long as the aluminum industry continues to be affected by the volatility of aluminum prices based on the LME, the Compensation Committee believes that setting annual targets within the three-year LTI plan, which is derived from the Company’s plan for long-term profitable growth (which includes three-year targets that have been

 

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announced publicly for each of the business groups), best holds management accountable for what they can control. Earned performance-based restricted share units will be converted into shares of Alcoa common stock three years from the date of the grant if the executive is still actively employed by the Company. Performance-based restricted share units are not convertible into Alcoa shares if an executive leaves the Company (other than to retire) before the units vest.

Performance-based restricted share units support longer-term operational targets, which differ from the financial metrics in our annual cash incentive plan. The named executive officers plus 34 other executives were eligible in 2014 to receive performance-based long-term stock incentives because they are in positions to have the most influence over the Company’s financial performance.

The number of performance-based restricted share units earned at the end of the three-year plan has been and will be determined as follows, based on the average of the annual payout percentages over the three-year period:

•

1/3 of the award was based on performance against the 2014 targets, which was earned at 136.2% (see table below),

•

1/3 of the award will be based on performance against the targets to be established for 2015, and

•

1/3 of the award will be based on performance against the targets to be established for 2016.

2014-2016 Performance-Based Equity Design and Results for 2014*

 

		Payout Percentage										2014   Result		Plan   Result		Weighting		% of 1/3 of Target Award  earned in 2014
Performance    Measure (%)		0%		50%		100%    (Target)		150%		200%
Revenue Growth		0.5%		1.6%		2.7%		4.5%		8.1%		2.73%		100.8%		25%			25.2	%
Adjusted EBITDA   Margin		8.3%		9.9%		11.6%		13.1%		14.7%		13.04%		148.0%		75%			111.0	%
TOTAL																100%			136.2	%

*	The figures in the “2014 Result” and “Plan Result” columns were rounded to one decimal place for the purposes of the table presentation. However, the figures in the “% of 1/3 of Target Award earned in 2014” column were calculated based on the unrounded figures.

For each year, a minimum performance level will also be established. For performance below that level, the portion of the award subject to performance criteria in that year will be forfeited and will not carry over into any future performance period.

As with the annual cash IC plan, we use a steep curve to achieve 100% performance, which is intended to drive maximum effort. We believe this design helped us to exceed our performance goals in 2014.

Other Compensation Policies and Practices

 

We highlight below certain executive compensation practices, both the practices we have implemented to incentivize performance and certain other practices that we have not implemented because we do not believe they would serve shareholders’ long-term interests.

What We Do

We Pay for Performance. We link our executives’ compensation to measured performance in key financial and non-financial areas. As noted above, performance against rigorous adjusted free cash flow, average year-to-date DWC, adjusted net income, adjusted EBITDA margin, revenue growth, safety, environmental, and workplace diversity targets is measured in determining compensation. These metrics, coupled with the individual performance multipliers, incentivize individual, business group, and corporate performance. The Company’s strategic priorities are reflected in these compensation metrics.

We Consider Peer Groups in Establishing Compensation. Our aluminum industry peers do not provide an adequate basis for compensation comparison purposes because there are too few of them, they are all located outside of the United States and they do not disclose sufficient comparative compensation data. As previously stated under the

 

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section “Analysis Of 2014 Compensation Decisions,” we developed a more focused peer group for 2014, consisting of 20 Materials and Industrials companies that are relevant to and aligned with Alcoa’s upstream (materials) and midstream and downstream (industrials) businesses to help set target total direct compensation for the CEO. We continued to use Towers Watson’s broad-based survey data for companies with revenues between $15 billion and $50 billion (excluding financial companies) to help estimate competitive compensation for other executive level positions. We target our compensation structure at the median of each of these groups of companies.

We Review Tally Sheets. The Compensation Committee reviews tally sheets that summarize various elements of historic and current compensation for each named executive officer in connection with making annual compensation decisions. This information includes compensation opportunity, actual compensation realized and wealth accumulation. We have found that the tally sheets help us synthesize the various components of our compensation program in making decisions.

We Have Robust Stock Ownership Guidelines. Our stock ownership requirements further align the interests of management with those of our shareholders by requiring executives to hold substantial equity in Alcoa until retirement. Our stock ownership guidelines require that the CEO retain equity equal in value to six times his base salary and that each of the other named executive officers retain equity equal in value to three times salary. These guidelines reinforce management’s focus on long-term shareholder value and commitment to the Company. Until the stock ownership requirements are met, each executive is required to retain until retirement 50% of shares acquired upon vesting of restricted share units or upon exercise of stock options that vest after March 1, 2011, after deducting shares used to pay for the option exercise price and taxes. Unvested restricted share units, unexercised stock options and any stock appreciation rights do not count towards meeting the stock ownership requirement. Those who have been named executive officers since 2011, when this policy was last amended, namely Messrs. Kleinfeld and Jarrault, met the guidelines as of January 31, 2015. Messrs. Oplinger and Wilt and Ms. Strauss, who were appointed to their current positions within the past three years, have not yet met the guidelines.

We Schedule and Price Stock Option Grants to Promote Transparency and Consistency. Alcoa grants stock options to named executive officers at a fixed time every year—generally the date of the Board and Committee meetings in January. Such meetings occur after we release earnings for the prior year and the performance of the Company for that year is publicly disclosed. The exercise price of employee stock options is the closing price of our stock on the grant date, as reported on the New York Stock Exchange.

We Have Clawback Policies Incorporated into Our Incentive Plans. The 2009 and 2013 Alcoa Stock Incentive Plans, the Incentive Compensation Plan for annual cash incentives and the Alcoa Internal Revenue Code Section 162(m) Compliant Annual Cash Incentive Compensation Plan each contain provisions permitting recovery of performance-based compensation. These provisions are explained in “Corporate Governance—Recovery of Incentive Compensation on page 29.”

We Have Double-Trigger Equity Vesting in the Event of a Change in Control. Awards granted under the 2009 Alcoa Stock Incentive Plan after February 15, 2011 and all awards granted under the 2013 Alcoa Stock Incentive Plan do not immediately vest upon a change in control if a replacement award is provided. The replacement award will vest immediately if, within a two-year period following a change in control, a plan participant is terminated without cause or leaves for good reason. Performance-based stock awards will be converted to time-vested stock awards upon a change in control under the following terms: (i) if 50% or more of the performance period has been completed as of the date on which the change in control has occurred, then the number of shares or the value of the award will be based on actual performance completed as of the date of the change in control; or (ii) if less than 50% of the performance period has been completed as of the date on which the change in control has occurred, then the number of shares or the value of the award will be based on the target number or value.

We Pay Reasonable Salaries to Our Senior Executives. Each named executive officer receives a salary that is determined after consideration of the median of the peer group for his or her position (as explained above and in Attachment B), performance and other factors. We pay salaries to the named executive officers to ensure an

 

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appropriate level of fixed compensation that enables the attraction and retention of highly skilled executives and mitigates the incentive to assume highly risky business strategies to maximize annual cash incentive compensation.

We Provide Appropriate Benefits to Our Senior Executives. The named executive officers participate in the same benefit plans as our salaried employees. We provide retirement and benefit plans to senior executives for the same reasons we provide them to employees—to provide a competitive compensation package that offers an opportunity for retirement, savings and health and welfare benefits. Retirement plans for senior executives generally pay the same formula amount as retirement plans for salaried employees, other than for Mr. Kleinfeld. Mr. Kleinfeld has an individual arrangement offset by retirement benefits provided by a prior employer. See discussion relating to “2014 Pension Benefits” on page 66.

We Have a Conservative Compensation Risk Profile. The Compensation Committee evaluates the risk profile of our compensation programs when establishing policies and approving plan design, and the Board of Directors annually considers risks related to compensation in its oversight of enterprise risk management. These evaluations noted numerous ways in which compensation risk is effectively managed or mitigated, including the following factors:

 

•

A balance of corporate and business unit weighting in incentive compensation plans;

•

A balanced mix between short-term and long-term incentives;

•

Caps on incentives;

•

Use of multiple performance measures in the annual cash incentive compensation plan and the equity incentive plan, with a focus on operational targets to drive free cash flow and profitability;

•

Discretion retained by the Compensation Committee to adjust individual awards;

•

Stock ownership guidelines requiring holding substantial equity in the Company until retirement;

•

Clawback policies applicable to all forms of incentive compensation;

•

Anti-hedging provisions in the Insider Trading Policy; and

•

Restricting stock options to 20% of the value of equity awards to senior officers.

In addition, (i) no business unit has a compensation structure significantly different from that of other units or that deviates significantly from the Company’s overall risk and reward structure; (ii) unlike financial institutions involved in the financial crisis, where leverage exceeded capital by many multiples, the Company has a conservative leverage policy with a target of keeping the debt-to-capital ratio in the range of 30% to 35%; and (iii) compensation incentives are not based on the results of speculative trading. In 1994, the Board of Directors adopted resolutions creating the Strategic Risk Management Committee with oversight of hedging and derivative risks and a mandate to use such instruments to manage risk and not for speculative purposes. As a result of these evaluations, we have determined that it is not reasonably likely that risks arising from our compensation and benefit plans would have a material adverse effect on the Company. See discussion related to “The Board’s Role in Risk Oversight” on page 22.

We Consider Tax Deductibility When Designing and Administering Our Incentive Compensation. Section 162(m) of the Internal Revenue Code limits deductibility of certain compensation to $1.0 million per year for the Company’s Chief Executive Officer and each of the three other most highly compensated executive officers (other than the Chief Financial Officer) who are employed at year-end. If certain conditions are met, performance-based compensation may be excluded from this limitation. Our shareholder-approved incentive compensation plans are designed with the intention that performance-based compensation paid under them may be eligible to qualify for deductibility under Section 162(m) and, in making compensation decisions, the Compensation Committee considers the potential deductibility of the proposed compensation. However, the Compensation Committee retains flexibility in administering our compensation programs and may exercise discretion to authorize awards or payments that it deems to be in the best interests of the Company and its shareholders which may not qualify for tax deductibility.

The Compensation Committee Retains an Independent Compensation Consultant. The Compensation Committee has authority under its charter to retain its own advisors, including compensation consultants. In 2014, the Committee directly retained Pay Governance LLC, which is independent and without conflicts of interest with the Company. See “Corporate Governance—Compensation Consultants” on page 28. Pay Governance LLC provided advice as requested by the Committee, on the amount and form of certain executive compensation components,

 

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Executive Compensation (continued)

 

 

 

including, among other things, executive compensation best practices, insights concerning SEC and say-on-pay policies, analysis and review of the Company’s compensation plans for executives and advice on setting the CEO’s compensation. Pay Governance LLC also provided advice on the Compensation Discussion and Analysis in this proxy statement. Pay Governance LLC did not provide any services to the Company other than the services provided directly to the Compensation Committee. We use comparative compensation data from the proxy statements of the CEO peer group of 20 companies and survey data from Towers Watson to help evaluate whether our compensation programs are competitive with the market. The latter is not customized based on parameters developed by Towers Watson. Towers Watson does not provide any advice or recommendations to the Compensation Committee on the amount or form of executive or director compensation.

What We Don’t Do

We Do Not Pay Dividend Equivalents on Stock Options and Unvested Restricted Share Units. Dividend equivalents are not paid currently on any restricted share units (including performance share units), but are accrued and paid only if the award vests. Dividend equivalents that accrue on restricted share units will be calculated at the same rate as dividends paid on the common stock of the Company. Dividend equivalents are not paid on stock options.

We Do Not Allow Share Recycling. The 2009 and 2013 Alcoa Stock Incentive Plans prohibit share recycling. Shares tendered in payment of the purchase price of a stock option award or withheld to pay taxes may not be added back to the available pool of shares.

We Do Not Allow Repricing of Underwater Stock Options (including cash-outs). The 2009 and 2013 Alcoa Stock Incentive Plans prohibit repricing, including cash-outs.

We Do Not Allow Hedging or Pledging of Company Stock. Short sales of Alcoa securities (a sale of securities which are not then owned) and derivative or speculative transactions in Alcoa securities by our directors, officers and employees are prohibited. No director, officer or employee or any designee of such director, officer or employee is permitted to purchase or use financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) that are designed to hedge or offset any decrease in the market value of Alcoa securities. Directors and officers subject to Section 16 of the Securities Exchange Act of 1934 are prohibited from holding Alcoa securities in margin accounts, pledging Alcoa securities as collateral, or maintaining an automatic rebalance feature in savings plans, deferred compensation or deferred fee plans.

We Do Not Have Excise Tax Gross-Ups for New Participants in Our Change in Control Severance Plan. The Change in Control Severance Plan provides that no excise or other tax gross-ups will be paid, and severance benefits will be available only upon termination of employment for “good reason” by an officer or without cause by the Company, with regard to any new plan participants after January 1, 2010. For a discussion of the Change in Control Severance Plan, see “Potential Payments Upon Termination or Change in Control” on page 68.

We Do Not Enter into Multi-Year Employment Contracts. It is the policy of the Compensation Committee not to enter into multi-year employment contracts with senior executives providing for guaranteed payments of cash or equity compensation.

We Do Not Provide Significant Perquisites. Consistent with our executive compensation philosophy and our commitment to emphasize performance-based pay, we limit the perquisites that we provide to our executive officers, including the named executive officers, to perquisites that serve reasonable business purposes. (For the named executive officers, see “Notes to 2014 Summary Compensation Table—Column (i)—All Other Compensation” on page 63.) For the Chief Executive Officer only, the Company provides for his personal use of Company aircraft and a Company car. The transportation benefits provided to the Chief Executive Officer are for security and efficiency reasons and to focus as much of his personal time on Company business as possible. No tax gross-ups are provided on these perquisites.

 

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Executive Compensation | 2014 Summary Compensation Table

 

 

 

2014 Summary Compensation Table

 

Name and   Principal Position    (a)		Year  (b)				Salary     ($) (c)				Bonus     ($) (d)				Stock     Awards     ($) (e)				Option     Awards     ($) (f)				Non-Equity Incentive Plan Compensation ($) (g)				Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($) (h)				All Other Compensation ($) (i)				Total ($) (j)
Klaus Kleinfeld   Chairman and Chief   Executive Officer			2014			$	1,440,000			$	0			$	6,960,058			$	1,740,011			$	3,228,984			$	4,568,900			$	220,569			$	18,158,522
			2013			$	1,440,000			$	0			$	6,560,011			$	1,640,016			$	3,177,360			$	1,788,146			$	220,273			$	14,825,806
			2012			$	1,440,000			$	0			$	6,080,033			$	1,520,013			$	2,484,000			$	2,599,289			$	203,566			$	14,326,901
William F. Oplinger			2014			$	500,000			$	0			$	1,288,037			$	322,028			$	849,375			$	413,526			$	30,000			$	3,402,966
Executive Vice			2013			$	436,875			$	0			$	800,088			$	202,138			$	650,557			$	90,220			$	26,213			$	2,206,091
President and   Chief Financial   Officer
Olivier M. Jarrault			2014			$	550,000			$	0			$	1,600,027			$	400,014			$	845,625			$	510,445			$	25,600			$	3,931,711
Executive Vice			2013			$	500,000			$	0			$	1,472,038			$	368,010			$	848,900			$	114,162			$	15,300			$	3,318,410
President and   Group President,   Engineered   Products   and Solutions			2012			$	500,000			$	0			$	1,408,037			$	352,021			$	677,400			$	343,887			$	20,000			$	3,301,345
Audrey Strauss			2014			$	565,000			$	0			$	1,408,042			$	352,018			$	844,618			$	0			$	78,277			$	3,247,955
Executive Vice			2013			$	565,000			$	0			$	1,408,013			$	352,016			$	914,227			$	0			$	65,107			$	3,304,363
President, Chief   Legal Officer and   Secretary			2012			$	376,667			$	1,500,000			$	0			$	0			$	475,240			$	0			$	33,900			$	2,385,807
Robert G. Wilt   Executive Vice   President and   Group President,   Global Primary   Products			2014			$	470,000			$	0			$	1,232,064			$	308,026			$	880,663			$	492,492			$	15,600			$	3,398,845

Notes to 2014 Summary Compensation Table

Column (a)—Named Executive Officers. The named executive officers include the chief executive officer, the chief financial officer, and the three other most highly compensated executives who were serving as executive officers at December 31, 2014. Under applicable SEC rules, we have excluded Mr. Wilt’s compensation for 2012 and 2013 and Mr. Oplinger’s compensation for 2012, as they were not named executive officers in those years. Ms. Strauss joined the Company in May 2012. For purposes of determining the most highly compensated executive officers, the amounts shown in column (h) were excluded.

Column (c)—Salary. This column represents each of the named executive officer’s annual base salary. Effective January 1, 2014, the Compensation Committee approved salary increases for Messrs. Oplinger, Jarrault and Wilt based on their strong performance in the previous year and to bring their salaries closer to market. Further details are included in the “Analysis of 2014 Compensation Decisions” section on page 53.

 

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Columns (e) and (f)—Stock Awards and Option Awards. The value of stock awards in column (e) and stock options in column (f) equals the grant date fair value, which is calculated in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718, Compensation—Stock Compensation. Performance share awards granted in January 2014 are shown at 100% of target. The fair value of the performance awards on the date of grant was as follows:

 

Name		Grant Date Value of Performance Award
		At Target				At Maximum
Klaus Kleinfeld		$	6,960,058			$	13,920,116
William F. Oplinger		$	1,288,037			$	2,576,074
Olivier M. Jarrault		$	1,600,027			$	3,200,054
Audrey Strauss		$	1,408,042			$	2,816,084
Robert G. Wilt		$	1,232,064			$	2,464,128

Stock awards are valued at the market price of a share of stock on the date of grant as determined by the closing price of Alcoa’s common stock. At the date of grant on January 16, 2014, the closing price of our common stock was $11.04. At December 31, 2014, the closing price of our common stock was $15.79.

For a discussion of the assumptions used to estimate the fair value of stock awards and stock options, please refer to the following sections in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014: “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-based Compensation” on pages 84 to 85 and the disclosures on “Stock-Based Compensation” in Notes A and R to the Consolidated Financial Statements on pages 99 and 137 to 138, respectively.

Column (g)—Non-Equity Incentive Plan Compensation. Reflects cash payments made under the annual Incentive Compensation Plan for 2014 performance. See the “2014 Annual Cash Incentive Compensation” section starting on page 55.

Column (h)—Change in Pension Value and Nonqualified Deferred Compensation Earnings. The amount shown reflects the aggregate change in the actuarial present value of each named executive officer’s accumulated benefit under all defined benefit and actuarial plans, including supplemental plans, from December 31, 2013 to December 31, 2014. Approximately 38% of the increase in Mr. Kleinfeld’s pension value was attributable to changes in the discount rate, mortality and exchange rate assumptions used for measurement of pension obligations from 2013 to 2014. Ms. Strauss has no change in pension value because she is not eligible to participate in the defined benefit pension plan, which was closed to employees hired after March 1, 2006.

Earnings on deferred compensation are not reflected in this column because the return on earnings is calculated in the same manner and at the same rate as earnings on externally managed investments of salaried employees participating in the tax-qualified 401(k) plan, and dividends on Company stock are paid at the same rate as dividends paid to shareholders.

 

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Column (i)—All Other Compensation.

Company Contributions to Savings Plans. The named executive officers are eligible to participate in the Alcoa Retirement Savings Plan and the Deferred Compensation Plan for U.S. salaried employees. Under our 401(k) tax-qualified retirement savings plan, participating employees may contribute up to 25% of base pay on a pre-tax basis and up to 10% on an after-tax basis. Alcoa matches 100% of employee pre-tax contributions up to 6% of base pay. If a named executive officer’s contributions to the savings plan exceed the limit on contributions imposed by the Internal Revenue Code, the executive may elect to have the amount over the limit “spill over” into the nonqualified Deferred Compensation Plan. For U.S. salaried employees hired after March 1, 2006, including Mr. Kleinfeld and Ms. Strauss, the Company also makes an Employer Retirement Income Contribution in an amount equal to 3% of salary and annual incentive compensation eligible for contribution to the Alcoa Retirement Savings Plan. In 2014, the Company’s contributions were as follows:

 

Name		Company Matching Contribution								3% Retirement Contribution								Total Company Contribution
		Savings Plan				Def. Comp. Plan				Savings Plan				Def. Comp. Plan
Klaus Kleinfeld			$15,600				$70,800				$7,800				$         0				$94,200
William F. Oplinger			$15,600				$14,400				$       0				$         0				$30,000
Olivier M. Jarrault			$15,600				$         0				$       0				$         0				$15,600
Audrey Strauss			$15,600				$18,300				$7,800				$36,577				$78,277
Robert G. Wilt			$15,600				$         0				$       0				$         0				$15,600

Company aircraft, car service and security. In 2014, the incremental cost of Mr. Kleinfeld’s personal use of Company aircraft was valued at $47,623. The incremental cost for the use of the Company aircraft is calculated based on the variable costs to the Company, including fuel costs, mileage, trip-related maintenance, universal weather monitoring costs, on-board catering, landing and ramp fees and other miscellaneous variable costs. Fixed costs, which do not change based on usage, such as pilot salaries, the lease costs of the Company aircraft and the cost of maintenance not related to trips, are excluded. Also in 2014, Mr. Kleinfeld had personal use of a Company car and driver valued at $66,142. Personal use of a Company car includes Mr. Kleinfeld’s commute to and from his home in Westchester County, New York and Alcoa’s office in New York City. Additionally, in 2014, an independent security review determined that there was a bona fide business-related security concern regarding the safety and security of our CEO. Based on the recommendations of this assessment, the Company upgraded some security features of the CEO’s personal residence at a cost of $12,604 in 2014.

Charitable Contributions. In 2014, the Alcoa Foundation matched $10,000 in contributions made by Mr. Jarrault in 2013 and 2014 to an approved charitable organization on which he serves as an advisory board member, pursuant to the Foundation’s nonprofit board placement program, which supports thought leadership and skills-based volunteerism by Alcoa employees.

 

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Executive Compensation (continued)

 

 

2014 Grants of Plan-Based Awards

 

				Estimated Future Payouts Under Non-Equity Incentive Plan Awards1								Estimated Future Payouts Under Equity Incentive Plan Awards2								All Other Stock Awards: Number of Shares of Stock		All Other Option Awards: Number of Securities Underlying		Exercise or Base Price of Option		2014 Grant Date Fair Value of Stock and Option
Name		Grant Date		Threshold ($)		Target ($)		Maximum4 ($)				Threshold (#)		Target (#)		Maximum (#)				or Units (#)		Options3 (#)		Awards ($/sh)		Awards ($)
(a)		(b)		(c)		(d)		(e)				(f)		(g)		(h)				(i)		(j)		(k)		(l)
Klaus Kleinfeld				$1,080,000		$2,160,000		$6,480,000
		1/16/2014										0		630,440			1,260,880					612,680		$11.04		$8,700,069
William F. Oplinger				$   250,000		$   500,000		$1,500,000
		1/16/2014										0		116,670			233,340					113,390		$11.04		$1,610,065
Olivier M. Jarrault				$   275,000		$   550,000		$1,650,000
		1/16/2014										0		144,930			289,860					140,850		$11.04		$2,000,041
Audrey Strauss				$   282,500		$   565,000		$1,695,000
		1/16/2014										0		127,540			255,080					123,950		$11.04		$1,760,060
Robert G. Wilt				$   235,000		$   470,000		$1,410,000
		1/16/2014										0		111,600			223,200					108,460		$11.04		$1,540,090

 

1

2014 annual cash incentive awards made under the Incentive Compensation Plan, see “Compensation Discussion and Analysis—2014 Annual Cash Incentive Compensation” on page 55.

2

Performance equity awards, in the form of restricted share units, granted under the 2013 Alcoa Stock Incentive Plan. See “Compensation Discussion and Analysis—2014 Equity Awards: Stock Options and Performance-Based Restricted Share Units” on page 56.

3

Time-vested stock options granted under the 2013 Alcoa Stock Incentive Plan, which vest ratably over a 3-year period and terminate the earlier of 10 years after grant or 5 years after retirement.

4

The maximum award under the 2014 cash incentive compensation plan formula is 200% of target. However, the Compensation and Benefits Committee has retained discretion to reduce the calculated award to zero or increase the calculated award by up to 150% of the calculated amount. The maximum amount of the award shown in this column is 150% of 200% to show the maximum discretionary amount that could possibly be awarded.

Grants of Plan-Based Awards (Actual Awards)

The Grants of Plan-Based Awards table sets forth the 2014 cash incentive and equity incentive opportunity for the named executive officers. The 2014 awards targets and performance are discussed in “Compensation Discussion and Analysis” beginning on page 40.

Mr. Kleinfeld. On January 16, 2014, Mr. Kleinfeld received an annual grant of 612,680 stock options and a grant of performance equity with a target amount of 630,440 restricted share units. The earned amount of the first third of the performance equity award was 286,221 restricted share units. He was paid cash incentive compensation for 2014 in the amount of $3,228,984.

Mr.  Oplinger. On January 16, 2014, Mr. Oplinger received an annual grant of 113,390 stock options and a grant of performance equity with a target amount of 116,670 restricted share units. The earned amount of the first third of the performance equity award was 52,969 restricted share units. He was paid cash incentive compensation for 2014 in the amount of $849,375.

Mr. Jarrault. On January 16, 2014, Mr. Jarrault received an annual grant of 140,850 stock options and a grant of performance equity with a target amount of 144,930 restricted share units. The earned amount of the first third of the performance equity award was 65,799 restricted share units. He was paid cash incentive compensation for 2014 in the amount of $845,625.

Ms. Strauss. On January 16, 2014, Ms. Strauss received an annual grant of 123,950 stock options and a grant of performance equity with a target amount of 127,540 restricted share units. The earned amount of the first third of the performance equity award was 57,905 restricted share units. She was paid cash incentive compensation for 2014 in the amount of $844,618.

 

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Mr. Wilt. On January 16, 2014, Mr. Wilt received an annual grant of 108,460 stock options and a grant of performance equity with a target amount of 111,600 restricted share units. The earned amount of the first third of the performance equity award was 50,667 restricted share units. He was paid cash incentive compensation for 2014 in the amount of $880,663.

2014 Outstanding Equity Awards at Fiscal Year-End

 

Option Awards

Stock Awards

Name

Number of Securities of Underlying Unexercised Options (Exercisable) (#)

Number of Securities Underlying Unexercised Options (Unexercisable) (#)

Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)

Option Exercise Price ($)

Option  Expiration  Date

Number of Shares or Units of Stock That Have Not Vested (#)

Market Value of Shares or Units of Stock That Have Not Vested ($)

Equity Incentive Plan Awards: Number  of Unearned Shares, Units or Other Rights That Have Not Vested (#)

Plan Awards: Market or Payout Value of   Unearned Shares, Units or   Other Rights That Have Not Vested ($)

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

Klaus Kleinfeld

Stock Awards1

761,553

$12,024,922*