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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

Filed by the Registrant ☒

Filed by a Party other than the Registrant ☐

Check the appropriate box:

 

☐	Preliminary Proxy Statement

 

☐	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

☒	Definitive Proxy Statement

 

☐	Definitive Additional Materials

 

☐	Soliciting Material Pursuant to §240.14a-12

 

 

Arconic Inc.

 

(Name of Registrant as Specified In Its Charter)

 

 

 

  

 

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

 

Payment of Filing Fee (Check the appropriate box):

 

☒	No fee required.

 

☐	Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

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☐	Fee paid previously with preliminary materials.

 

☐	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 2017 Annual Meeting of Shareholders and Proxy Statement

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March 13, 2017

Dear Arconic Shareholders:

 

You are cordially invited to attend the 2017 Annual Meeting of Shareholders of Arconic Inc. to be held on Tuesday, May 16, 2017, at 9:00 a.m., Eastern Time, at The Performing Arts Center, Purchase College, SUNY, 735 Anderson Hill Road, Purchase, New York 10577.   We are pleased to present you with our 2017 Proxy Statement. Our 2017 Annual Meeting will be our first annual meeting since we completed our transformational separation of Alcoa Inc. into Arconic and Alcoa Corporation in November 2016. At the 2017 Annual Meeting, shareholders will vote on the matters set forth in the 2017 Proxy Statement and the accompanying notice of the annual meeting. Your Board of Directors has recommended five highly qualified and experienced nominees for election to the Board of Directors at the 2017 Annual Meeting. Highlights of the detailed information included in the proxy statement can be found in the “Proxy Summary” starting on page 1, and detailed information regarding the director candidates can be found under “Item 1 – Election of Directors” starting on page 9. Additionally, enclosed with the Proxy Statement is a WHITE proxy card and postage-paid return envelope. WHITE proxy cards are being solicited on behalf of the Arconic Board of Directors.

Your vote will be especially important for our 2017 Annual Meeting. As you may have heard, Elliott International, L.P. (together with its affiliates and related parties, “Elliott”) has notified Arconic that Elliott intends to nominate a slate of four nominees for election to the Board of Directors at the meeting in opposition to the nominees recommended by our Board of Directors. You may receive a proxy statement, Blue proxy card and other solicitation materials from Elliott. Arconic is not responsible for the accuracy of any information provided by or relating to Elliott or its nominees contained in solicitation materials filed or disseminated by or on behalf of Elliott or any other statements that Elliott may make.

The Arconic Board of Directors does not endorse any Elliott nominees and unanimously recommends that you vote FOR the election of each of the nominees proposed by the Board of Directors on your WHITE proxy card. The Board of Directors strongly urges you not to sign or return any Blue proxy card sent to you by Elliott. If you have previously submitted a Blue proxy card sent to you by Elliott, you can revoke that proxy and vote for our Board of Directors’ nominees and on the other matters to be voted on at the 2017 Annual Meeting by using the enclosed WHITE proxy card.

Whether or not you will attend the meeting, we hope that your shares are represented and voted. In advance of the meeting on May 16, please cast your vote through the Internet, by telephone or by mail as described in your WHITE proxy card. Instructions on how to vote are found in the section entitled “Proxy Summary—How to Cast Your Vote” on page 1.

For more information and up-to-date postings, please go to our website, www.arconic.com/annualmeeting. If you have any questions or need assistance voting, please contact Innisfree M&A Incorporated, our proxy solicitor assisting us in connection with the 2017 Annual Meeting. Shareholders may call toll free at 1-877-750-5836. Banks and brokers may call collect at 1-212-750-5833.

Thank you for being a shareholder of Arconic.

Sincerely,

Klaus Kleinfeld

Chairman and Chief Executive Officer

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Tuesday, May 16, 2017 9:00 a.m. Eastern Time		The Performing Arts Center Purchase College, SUNY 735 Anderson Hill Road Purchase, New York 10577

 

The Annual Meeting of Shareholders of Arconic Inc. (“Arconic” or the “Company”) will be held on Tuesday, May 16, 2017 at 9:00 a.m. Eastern Time, at The Performing Arts Center, Purchase College, SUNY, 735 Anderson Hill Road, Purchase, New York 10577. Shareholders of record of Arconic common stock at the close of business on March 1, 2017 are entitled to vote at the meeting.

The purposes of the meeting are:

 

1.	to elect five directors to serve three-year terms expiring at the 2020 annual meeting of shareholders (or until the 2018 annual meeting, if Item 8 is approved, as described in the accompanying proxy statement);

2.	to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2017;

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

4.	to approve, on an advisory basis, the frequency of the advisory vote on executive compensation;

5.	to approve an amendment of the Articles of Incorporation to eliminate the supermajority voting requirement in the Articles of Incorporation regarding amending Article SEVENTH (fair price protection);

6.	to approve an amendment of the Articles of Incorporation to eliminate the supermajority voting requirement in the Articles of Incorporation regarding amending Article EIGHTH (director elections);

7.	to approve an amendment of the Articles of Incorporation to eliminate the supermajority voting requirement in the Articles of Incorporation relating to the removal of directors;

8.	to approve an amendment of the Articles of Incorporation to eliminate the classification of the Board of Directors;

9.	to vote on a shareholder proposal, if properly presented at the meeting; and

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

Shareholders of record at the close of business on March 1, 2017, the record date for the 2017 Annual Meeting, will be entitled to vote at the meeting. Only shareholders and authorized guests of the Company may attend the meeting and all attendees will be required to show a valid form of ID (such as a government-issued form of photo identification). If you hold your shares in street-name (i.e., through a bank or broker), you must also provide proof of share ownership, such as a letter from your bank or broker or a recent brokerage statement. Street-name holders planning on voting in person at the annual meeting must provide a “legal proxy” from their bank or broker.

Please note that Elliott has notified the Company of its intent to nominate a slate of four nominees for election to the Board of Directors at the meeting. You may receive a proxy statement, Blue proxy card and other solicitation materials from Elliott. The Arconic Board of Directors does not endorse any Elliott nominees and unanimously recommends that you vote FOR the election of each of the nominees proposed by the Board of Directors on the WHITE proxy card. Our Board of Directors strongly urges you not to sign or return any Blue proxy card sent to you by Elliott. Please note that voting to “withhold” with respect to any Elliott nominee on a Blue proxy card sent to you by Elliott is not the same as voting for your Board of Directors’ nominees because a vote to “withhold” with respect to any Elliott nominee on its Blue proxy

 

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card will revoke any WHITE proxy you may have previously submitted. To support the Board of Directors’ nominees, you should vote FOR the Board’s nominees on the WHITE proxy card and disregard, and not return, any Blue proxy card sent to you by Elliott. If you have previously submitted a Blue proxy card sent to you by Elliott, you can revoke that proxy and vote for the Board of Directors’ nominees and on the other matters to be voted on at the meeting by using the enclosed WHITE proxy card.

YOUR VOTE IS VERY IMPORTANT. Even if you plan to attend the 2017 Annual Meeting, we request that you read the proxy statement and vote your shares by signing, dating and returning the enclosed WHITE proxy card in the postage-paid envelope provided or by voting via the Internet or by telephone using the instructions provided on the enclosed WHITE proxy card.

If your brokerage firm, bank, broker-dealer or other similar organization is the holder of record of your shares (i.e., your shares are held in “street name”), you will receive voting instructions from the holder of record. You must follow these instructions in order for your shares to be voted. Your broker is required to vote those shares in accordance with your instructions. Because of the contested nature of the proposals, if you do not give instructions to your broker, your broker may not be able to vote your shares with respect to the election of directors (Proposal 1) or any of the other proposals to be voted on at the meeting. We urge you to instruct your broker or other nominee, by following those instructions, to vote your shares in line with the Board’s recommendations on the WHITE proxy card.

The Company’s Notice of 2017 Annual Meeting of Shareholders and Proxy Statement and 2016 Annual Report are also available at www.arconic.com/annualmeeting. If you have any questions or need assistance voting, please contact Innisfree M&A Incorporated, our proxy solicitor assisting us in connection with the 2017 Annual Meeting.

Shareholders may call toll free at 1-877-750-5836. Banks and brokers may call collect at 1-212-750-5833.

On behalf of Arconic’s Board of Directors,

 

Katherine Hargrove Ramundo

Executive Vice President, Chief Legal Officer and Corporate Secretary

March 13, 2017

 

The enclosed proxy statement is first being mailed to shareholders on or about March 17, 2017.

 

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NOTICE OF 2017 ANNUAL MEETING OF SHAREHOLDERS			i
PROXY STATEMENT			1
Proxy Summary			1
Background to the Solicitation			5
Item 1 Election of Directors			9
Summary of Director Attributes and Skills			11
Board of Directors’ Nominees			12
Directors			14
Nominating Board Candidates – Procedures and Director Qualifications			19
Director Compensation			21
Director Fees			21
Directors’ Alignment with Shareholders			22
2016 Director Compensation			23
Corporate Governance			25
The Structure and Role of the Board of Directors			26
Board Leadership Structure			26
The Board’s Role in Risk Oversight			27
Director Qualifications, Board Diversity and Board Tenure			28
Board Meetings and Attendance			29
Board, Committee and Director Evaluations			29
Committees of the Board			30
Voting for Directors			32
Communications with Directors			32
Director Independence			33
Related Person Transactions			33
Compensation Committee Interlocks and Insider Participation			34
Compensation Consultants			34
Corporate Governance Materials Available on Arconic’s Website			35
Business Conduct Policies and Code of Ethics			35
Recovery of Incentive Compensation			35
Section 16(a) Beneficial Ownership Reporting Compliance			37
Arconic Stock Ownership			37
Stock Ownership of Certain Beneficial Owners			37
Stock Ownership of Directors and Executive Officers			38
Item  2 Ratification of Appointment of Independent Registered Public Accounting Firm			41
Report of the Audit Committee			41
Audit and Non-Audit Fees			43

 

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Item 3 Advisory Approval of Executive Compensation			44
Compensation Committee Report			44
Executive Compensation			45
Compensation Discussion and Analysis			45
Executive Summary			45
Compensation Design and Analysis			55
Analysis of 2016 Compensation Decisions			55
2016 Annual Cash Incentive Compensation			58
2016 Equity Awards: Stock Options and Performance-Based Restricted Share Units			60
Other Compensation Policies and Practices			61
2016 Summary Compensation Table			65
2016 Grants of Plan-Based Awards			67
2016 Outstanding Equity Awards at Fiscal Year-End			69
2016 Option Exercises and Stock Vested			70
2016 Pension Benefits			70
2016 Nonqualified Deferred Compensation			71
Potential Payments Upon Termination or Change in Control			72
Item 4 Advisory Vote on Frequency of Advisory Vote on Executive Compensation			75
Items 5, 6 and 7 Eliminate Supermajority Voting Provisions in Articles of Incorporation			76
Item  5 Eliminate Supermajority Voting Requirement in the Articles of Incorporation Regarding Amending Article SEVENTH (Fair Price Protection)			77
Item  6 Eliminate Supermajority Voting Requirement in the Articles of Incorporation Regarding Amending Article EIGHTH (Director Elections)			78
Item  7 Eliminate Supermajority Voting Requirement in Article EIGHTH of the Articles of Incorporation Relating to the Removal of Directors			79
Item  8 Eliminate the Classified Board Structure by Approving Amendments to the Articles of Incorporation			80
Item 9 Shareholder Proposal			82
Questions and Answers About the Meeting and Voting			83
Attachments			90
Attachment A    — Pre-Approval Policies and Procedures for Audit and Non-Audit Services			90
Attachment B-1 — Alcoa Inc. Peer Group Companies for Market Information for 2016 Executive Compensation Decisions			92
Attachment B-2 — Arconic Inc. Peer Group Companies for Market Information for 2016 Executive Compensation Decisions Following the Separation			94
Attachment C    — Calculation of Financial Measures			95
Attachment D    — Articles of Incorporation of Arconic Inc.			103
Appendix			111
Appendix A — Supplemental Information Regarding Participants			111

 

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2017 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 Arconic’s 2016 Annual Report before you vote.

 

 

 

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2017 PROXY STATEMENT

 

Proxy Summary (continued)

 

 

 

See the “Questions and Answers About the Meeting and Voting” section for more details. If you have any questions or need assistance voting, please contact Innisfree M&A Incorporated, our proxy solicitor assisting us in connection with the 2017 Annual Meeting. Shareholders may call toll free at 1-877-750-5836. Banks and brokers may call collect at 1-212-750-5833.

 

 

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2017 PROXY STATEMENT

 

Proxy Summary (continued)

 

 

 

 

 

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2017 PROXY STATEMENT

 

Proxy Summary (continued)

 

 

 

 

 

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2017 PROXY STATEMENT

 

Background to the Solicitation

 

On September 28, 2015, Alcoa Inc. (“Alcoa”), the predecessor to Arconic, announced that its Board of Directors had approved a plan to separate Alcoa into two independent, publicly-traded companies. Shortly thereafter, a representative of Elliott contacted Alcoa to indicate that Elliott was a substantial shareholder of Alcoa.

On October 21, 2015, at the request of Elliott, members of Alcoa management met with representatives of Elliott, during which meeting the Elliott representatives provided a presentation and related materials expressing support for Alcoa’s decision to pursue the separation and noting that “Dr. Kleinfeld and his team have undertaken a significant and impressive transformation at Alcoa.” Elliott’s representatives also expressed their views regarding ways to improve Alcoa’s investor communications, the structure of the separation, operating margins and corporate governance.

On November 4, 2015, Elliott notified Alcoa that it had filed notices under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 to enable Elliott to acquire more than $152.5 million of Alcoa’s common stock, including shares that Elliott already owned.

On November 9, 2015, at Elliott’s request, members of Alcoa’s management team met with representatives of Elliott, during which meeting Elliott provided a revised version of its prior presentation to Alcoa. Throughout this period from October 2015 through January 2016, Alcoa’s management team and advisors continued to evaluate Elliott’s views and engage in discussions from time to time with Elliott and its advisors, and Alcoa’s Board received periodic reports of these discussions and considered Elliott’s views.

On November 23, 2015, Elliott filed a Schedule 13D with the SEC reporting beneficial ownership of and combined economic exposure to approximately 5.1% and 6.4%, respectively, of Alcoa’s outstanding common stock. Elliott also indicated in the Schedule 13D that it believed the separation would create value substantially above the current Alcoa share price, and that it was seeking to engage in a constructive dialogue with Alcoa’s management and Board regarding the separation.

On January 20, 2016, Mr. Kleinfeld and another representative of Alcoa, met with representatives of Elliott, at which meeting the Elliott representatives provided a revised presentation criticizing various aspects of Alcoa’s operating performance, communications to investors, corporate governance and Board composition, and requested the appointment of four new members to the Alcoa Board from a list of candidates approved by Elliott, among other things.

On January 25, 2016, Elliott filed with the SEC an amendment to its Schedule 13D disclosing that it had increased its beneficial ownership of and combined economic exposure to approximately 6.3% and 7.4%, respectively, of Alcoa’s outstanding common stock.

Over the next several days following the January 20, 2016 meeting, Alcoa and its representatives sought to negotiate the terms of a settlement agreement with Elliott in order to avoid a proxy fight. During this time, several meetings of Alcoa’s Board or a committee thereof were held, during which the directors engaged in extensive discussions regarding, and determined to seek to resolve, Elliott’s demands.

On February 1, 2016, Alcoa and Elliott entered into an agreement pursuant to which Alcoa increased the size of its Board and appointed three individuals nominated by Elliott, Ulrich (Rick) Schmidt, Sean O. Mahoney and John C. Plant, to fill the vacancies resulting from such increase. Alcoa also agreed that each of these three Elliott nominees would be appointed to the board of directors of the value-add company (which later became Arconic) resulting from the previously announced separation. Under the agreement, Elliott agreed to refrain from engaging in solicitations of proxies, acquiring voting securities of Alcoa in excess of specified thresholds, or making disparaging statements regarding Alcoa and its directors and officers, in each case until a specified date. As contemplated by the agreement, Alcoa appointed Messrs. Schmidt, Plant and Mahoney to its Board effective as of February 5, 2016.

On February 1, 2016, Elliott filed with the SEC an amendment to its Schedule 13D disclosing that it had increased its beneficial ownership of and combined economic exposure to approximately 6.6% and 7.5%, respectively, of Alcoa’s outstanding common stock.

Thereafter, Alcoa and its advisors had numerous discussions with representatives of Elliott and its advisors regarding business, financial and legal aspects of the separation and certain other matters, and all of Elliott’s suggestions were discussed and considered by Alcoa.

 

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2017 PROXY STATEMENT

 

Background to the Solicitation (continued)

 

 

 

On September 29, 2016, the Alcoa Board approved the separation of Alcoa Inc. into two independent companies—Alcoa Corporation and Arconic Inc.

On November 1, 2016, Alcoa completed the separation by distributing approximately 80.1% of the outstanding shares of Alcoa Corporation, which held the upstream business, to Alcoa shareholders. In connection with the separation, Alcoa was renamed Arconic.

On November 4, 2016, Elliott filed with the SEC an amendment to its Schedule 13D disclosing that it had increased its beneficial ownership of and combined economic exposure to approximately 8.1% and 9.0%, respectively, of Arconic’s outstanding common stock.

On November 15, 2016, Elliott filed with the SEC an additional amendment to its Schedule 13D disclosing that it had increased its beneficial ownership of and combined economic exposure to approximately 9.1% and 10.0%, respectively, of Arconic’s outstanding common stock.

On November 30, 2016, five independent directors of Arconic’s Board—namely, Ms. Russo and Messrs. Collins, Gupta, Mahoney and O’Neal—met with representatives of Elliott. At the meeting, the Elliott representatives provided the directors with a presentation criticizing Arconic’s operating performance and the leadership of Mr. Kleinfeld as Chairman and Chief Executive Officer.

On December 2, 2016, the Executive Committee of the Board held a meeting (to which all of the members of the Board were invited) to discuss the views expressed by Elliott’s representatives. During the meeting, the directors reviewed a report prepared by Arconic management with information in response to the assertions in the Elliott presentation and determined that Mr. Kleinfeld should meet with representatives of Elliott in order to afford them an opportunity to ask him questions and obtain his perspective on Arconic and its business.

On December 8, 2016, Elliott and Arconic executed a confidentiality agreement that required, among other things, Elliott and its representatives to maintain the confidentiality of certain information to be provided by Arconic to Elliott in advance of Arconic’s upcoming Investor Day.

On December 8, 2016, Elliott filed with the SEC an amendment to its Schedule 13D disclosing that it had increased its beneficial ownership of and combined economic exposure to approximately 9.6% and 11.1%, respectively, of Arconic’s outstanding common stock.

On December 9, 2016, Mr. Kleinfeld met with representatives of Elliott to discuss their views and, at the meeting, Mr. Kleinfeld provided them with a written presentation containing information regarding Arconic’s businesses and three-year financial targets that was being prepared for Arconic’s Investor Day, which was held on December 14, 2016. The presentation was also reviewed by the Board.

On December 15, 2016, Mr. Kleinfeld engaged in further discussions with representatives of Elliott. Subsequently, on December 16, 2016, the directors had a telephonic meeting to discuss the views expressed by Elliott and it was determined that certain independent directors of the Board would request a further meeting with representatives of Elliott.

Following the expiration of the standstill and non-disparagement restrictions in the February 2016 agreement between Alcoa and Elliott, representatives of Elliott sent a letter to the Board on January 9, 2017, criticizing the leadership and track record of Mr. Kleinfeld in his capacity as Arconic’s Chairman and Chief Executive Officer.

On January 10, 2017, Ms. Russo and Messrs. Collins, Gupta, Mahoney and O’Neal met with representatives of Elliott. At the meeting, Elliott’s representatives raised criticisms of various aspects of Alcoa’s operating performance and Mr. Kleinfeld’s leadership that Elliott suggested the Board should review.

Following this meeting, the directors who attended the meeting discussed Elliott’s views with Mr. Kleinfeld and requested that Arconic’s management team perform various analyses to permit the Board to review Elliott’s assertions. Thereafter, over the course of several days, three of the independent members of the Board met with several Arconic shareholders to obtain their views.

On January 13, 2017, the Board held a meeting to discuss the views expressed by Elliott’s representatives and engage in a detailed review of Arconic’s businesses, management and Mr. Kleinfeld’s leadership as Chairman and Chief Executive Officer, including discussions in an executive session of the independent directors of the Board. The directors discussed and

 

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2017 PROXY STATEMENT

 

Background to the Solicitation (continued)

 

 

 

evaluated each of Elliott’s assertions set forth in its January 9, 2017 letter and/or expressed at the January 10, 2017 meeting. The Board reviewed, among other things, analyses and data prepared by Arconic’s management team and/or external financial, legal and other advisors regarding shareholder returns; financial and operating performance; margins and product mix; corporate overhead; capital expenditures, including research and development expenditures; Arconic’s record of achieving or failing to achieve its financial targets; prior acquisitions by Arconic, including the Firth Rixson acquisition; the cost curves of Alcoa’s upstream business; Arconic’s corporate governance profile; internal culture; management turnover; and Mr. Kleinfeld’s participation in business forums and membership on other boards of directors and organizations. Following extensive discussion, the Board requested further information and analyses on various items.

On January 18, 2017, Elliott’s counsel submitted a request for Arconic’s form of director nominee questionnaire and written representation and agreement required by Arconic’s By-Laws, which were subsequently provided to Elliott.

On January 20, 2017, Elliott submitted a request for certain stocklist materials and other corporate records of Arconic pursuant to Section 1508 of the Pennsylvania Business Corporation Law. On January 30, 2017, Elliott and Arconic entered into a confidentiality agreement relating to the materials to be provided pursuant to such demand, and responsive information was subsequently provided by Arconic to Elliott.

On January 24, 2017, the Board held a meeting to continue its review of Arconic’s businesses, management and Mr. Kleinfeld’s leadership as Chairman and Chief Executive Officer, including an executive session of the independent directors of the Board. The Board reviewed, among other things, reports regarding interviews and/or meetings with certain customers, current and former executives, and shareholders of Arconic that were conducted by independent directors of the Board, as well as further analyses and information prepared by Arconic’s management and external financial advisors in response to questions raised by directors at the January 13, 2017 Board meeting. The Board discussed, among other things, potential risks, detriments and benefits of making changes to Arconic’s management and operations or engaging in a proxy fight, succession planning and the Board’s policies and procedures in overseeing Mr. Kleinfeld and the management team.

Following this extensive due diligence review by the Board of Arconic’s businesses, management and Mr. Kleinfeld’s performance and leadership as Chairman and Chief Executive Officer—including, among other things, reports from external financial and other advisors; reports from Arconic’s management team; interviews and discussions with shareholders, customers and other business counterparties, and current and former executives of Arconic; executive sessions of the independent directors; discussions with legal counsel; and multiple meetings between representatives of Elliott and independent directors and between representatives of Elliott and Mr. Kleinfeld—the Board unanimously concluded that it is in the best interests of Arconic and its shareholders for Mr. Kleinfeld to continue in his role as Chairman and Chief Executive Officer.

In addition, the Board considered potential actions to enhance the Board’s oversight role and Arconic’s operations as a newly standalone public company as well as to address Elliott’s criticisms. Among other things, the Board determined to engage in detailed supplemental reviews of operations on a regular basis, and to establish a Finance Committee of the Board to supplement the full Board’s review of capital allocation, capital expenditures, mergers and acquisitions and capital markets activities. The Board also concluded that it would continue to closely monitor the execution of Arconic’s strategic plan.

On January 25, 2017, Elliott filed with the SEC an amendment to its Schedule 13D disclosing that it had increased its beneficial ownership of and combined economic exposure to approximately 10.3% and 11.9%, respectively, of Arconic’s outstanding common stock.

On January 30, 2017, Ms. Russo and Messrs. Collins, Gupta, Mahoney and O’Neal met with representatives of Elliott to assure Elliott that the Board had thoroughly considered Elliott’s criticisms and reviewed a comprehensive range of topics, including the topics that Elliott had suggested. The directors informed Elliott’s representatives that, following this review, the Board had unanimously concluded that it was in the best interests of Arconic and its shareholders for Mr. Kleinfeld to continue as Chairman and Chief Executive Officer. They also indicated that they believed the cost and distraction of a proxy fight would not be in the best interests of shareholders, and they outlined actions the Board planned to take to address Elliott’s criticisms.

On January 31, 2017, Elliott delivered a notice to Arconic of its intention to nominate a slate of five nominees to stand for election at the 2017 Annual Meeting. Elliott also issued a press release and an investor presentation announcing its director

 

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2017 PROXY STATEMENT

 

Background to the Solicitation (continued)

 

 

 

nominations, calling for the Board to remove Mr. Kleinfeld as Chairman and Chief Executive Officer and suggesting that Larry Lawson should be installed as his replacement. Thereafter, between January 31, 2017 and February 3, 2017, Elliott made material revisions to its investor presentation and issued revised versions of its analysis on at least four occasions, and on February 3, 2017, Elliott filed the fifth version of its investor presentation with the SEC.

On January 31, 2017, Arconic issued a press release announcing that its 12 independent directors, three of whom had been nominated by Elliott, unanimously supported Arconic management and Mr. Kleinfeld as Chairman and Chief Executive Officer.

On February 1, 2017, Elliott filed with the SEC an amendment to its Schedule 13D disclosing that it had increased its beneficial ownership of and combined economic exposure to approximately 10.5% and 12.2%, respectively, of Arconic’s outstanding common stock. Elliott also released a letter to Arconic shareholders expressing its disagreement with the Board and urging shareholders to support Elliott’s director nominees.

On February 6, 2017, the independent members of the Board issued a letter to shareholders reiterating the Board’s unanimous support of Arconic’s strategy and Mr. Kleinfeld as Chairman and Chief Executive Officer.

On February 7, 2017, Elliott issued a press release and letter to the Board responding to the Board’s February 6, 2017 letter, and Arconic issued a press release commenting on Elliott’s multiple restatements of the financial analysis in its investor presentation dated January 31, 2017.

On February 13, 2017, Elliott issued a letter to the Board reiterating Elliott’s demand for new leadership of Arconic.

On February 22, 2017, the Board held a meeting to review additional information regarding Arconic’s performance and strategy, which had been prepared by the Company’s management and outside advisors. In addition, on February 23, 2017, the Governance and Nominating Committee and the Board held meetings during which they considered and discussed the Company’s potential director nominees.

On February 23, 2017, Elliott issued a letter to the Board again reiterating Elliott’s demand for new leadership of Arconic.

On February 24, 2017, a representative of Elliott spoke to Ms. Russo, the Company’s Lead Director, and sent a letter to the Board, to propose that the Board should publicly announce the formation of a search committee to find a new Chief Executive Officer to replace Mr. Kleinfeld.

On February 27, 2017, the Board held a telephonic meeting to consider and discuss the potential appointment of David P. Hess to the Board to fill a vacancy that could result from the resignation of Martin S. Sorrell, who had indicated he was considering resigning from the Board, as well as the nomination of Mr. Hess for election at the 2017 Annual Meeting.

On February 28, 2017, Elliott filed with the SEC an amendment to its Schedule 13D disclosing that it had increased its beneficial ownership of and combined economic exposure to approximately 11.7% and 13.3%, respectively, of Arconic’s outstanding common stock.

On March 2, 2017, Arconic issued a press release announcing that the Board had appointed Mr. Hess to serve as an independent director on the Board, to fill the vacancy resulting from Mr. Sorrell’s resignation, both effective March 10, 2017. Arconic also announced a number of steps that the Board has taken to enhance and tailor the Company’s governance practices.

On March 2, 2017, the independent members of the Board issued a letter to shareholders reiterating the Board’s unanimous support of Arconic’s strategy and Mr. Kleinfeld as Chairman and Chief Executive Officer.

On March 9, 2017, Elliott filed with the SEC its definitive proxy statement for the 2017 Annual Meeting.

On March 10, 2017, Elliott filed with the SEC an amendment to its Schedule 13D disclosing its Consulting Agreement and Indemnification Agreement with Mr. Lawson.

During the period following Elliott’s announcement of its nominations, each of Elliott and Arconic made publicly available, and filed with the SEC, various additional solicitation materials.

 

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2017 PROXY STATEMENT

 

Item 1 Election of Directors

 

As of the date of this proxy statement, Arconic’s Board of Directors comprises 13 members divided into three classes. Directors are elected for three-year terms. The terms for each class end in successive years. However, if shareholders approve Item 8 at the 2017 Annual Meeting, the Company will file articles of amendment that will provide that the Board of Directors will no longer be divided into three classes and, commencing at the 2018 annual meeting, all of the members of the Board will be elected for one-year terms. Therefore, if Item 8 is approved, the directors elected at the 2017 Annual Meeting, as well as all of the directors who are not standing for election at the 2017 Annual Meeting, will serve until the 2018 annual meeting.

The Board of Directors, upon the recommendation of the Governance and Nominating Committee, has nominated five incumbent directors, Amy E. Alving, David P. Hess, Klaus Kleinfeld, Ulrich “Rick” Schmidt and Ratan N. Tata, to stand for reelection to the Board for a three-year term expiring in 2020 (or, if Item 8 is approved, a one-year term expiring in 2018).

Elliott has notified the Company of its intent to nominate a slate of four nominees for election to the Board of Directors at the meeting. The Governance and Nominating Committee reviewed the director nominees proposed by Elliott and determined not to recommend the Elliott nominees and to instead recommend the Board’s nominees in light of their backgrounds, career experiences and qualifications, as well as their respective contributions to the Board’s mix of skills and experiences.

You may receive a proxy statement, Blue proxy card and other solicitation materials from Elliott. The Arconic Board of Directors does not endorse any Elliott nominees and unanimously recommends that you vote FOR the election of each of the nominees proposed by the Board of Directors on the WHITE proxy card. Our Board of Directors strongly urges you not to sign or return any Blue proxy card sent to you by Elliott. Please note that voting to “withhold” with respect to any Elliott nominee on a Blue proxy card sent to you by Elliott is not the same as voting for your Board’s nominees because a vote to “withhold” with respect to any Elliott nominee on its Blue proxy card will revoke any WHITE proxy you may have previously submitted. To support the Board of Directors’ nominees, you should vote FOR the Board’s nominees on the WHITE proxy card and disregard, and not return, any Blue proxy card sent to you by Elliott. If you have previously submitted a Blue proxy card sent to you by Elliott, you can revoke that proxy and vote for the Board of Directors’ nominees and on the other matters to be voted on at the meeting by using the enclosed WHITE proxy card.

Your vote is very important. Even if you plan to attend the 2017 Annual Meeting, we request that you vote your shares by signing, dating and returning the enclosed WHITE proxy card in the postage-paid envelope provided or by voting via the Internet or by telephone using the instructions provided on the enclosed WHITE proxy card. If your brokerage firm, bank, broker-dealer or other similar organization is the holder of record of your shares (i.e., your shares are held in “street name”), you will receive voting instructions from the holder of record. You must follow these instructions in order for your shares to be voted. Your broker is required to vote those shares in accordance with your instructions. Because of the contested nature of the proposals, if you do not give instructions to your broker, your broker may not be able to vote your shares with respect to the election of directors or any of the other proposals. We urge you to instruct your broker or other nominee, by following those instructions, to vote your shares in line with the Board’s recommendations on the WHITE proxy card.

The persons named as proxies intend to vote the proxies FOR the election of each of the Board’s five nominees unless you indicate on the WHITE proxy card a vote to “WITHHOLD” your vote with respect to any of the nominees.

Messrs. Kleinfeld and Tata were elected by the shareholders at the 2014 Annual Meeting of Shareholders. Mr. Schmidt was appointed to the Board of Directors, effective February 5, 2016, in connection with an agreement that the Company entered into on February 1, 2016 with Elliott. Dr. Alving was appointed to the Board of Directors, effective November 1, 2016, in connection with the separation of Alcoa Inc. into Arconic and Alcoa Corporation. Mr. Hess was appointed to the Board of Directors, effective March 10, 2017, to fill the vacancy resulting from Martin S. Sorrell’s resignation from the Board of Directors.

The Board of Directors has affirmatively determined that each of the Board’s five nominees qualifies for election under the Company’s criteria for evaluation of directors (see “Minimum Qualifications for Director Nominees and Board Member Attributes” on page 19 and “Board, Committee and Director Evaluations” on page 29). Included in each such nominee’s

 

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Item 1 Election of Directors (continued)

 

 

 

biography below is a description of the qualifications, experience, attributes and skills of such nominee. In addition, the Governance and Nominating Committee and the Board determined that, although Mr. Tata currently exceeds the Company’s director retirement policy age of 75, his management and industry experience, global perspective, and qualifications, including his leadership role as Chairman of the Tata Trusts, as noted in his nominee biography below, provide significant contributions to the Board, and therefore that Mr. Tata was qualified to stand for re-election despite being over age 75. The director retirement policy in the Company’s Corporate Governance Guidelines authorizes the Governance and Nominating Committee and the Board to determine that a director may stand for re-election despite having reached age 75.

In addition, the Board of Directors has determined that each Board nominee except Mr. Kleinfeld 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 33.

If any of the Board’s nominees is unable to serve or for good cause will not serve as a director, the Board of Directors may choose a substitute nominee. If any substitute nominees are designated, we will file an amended proxy statement that, as applicable, identifies the substitute nominees, discloses that such nominees have consented to being named in the revised proxy statement and to serve if elected, and includes certain biographical and other information about such nominees required by SEC rules. The persons named as proxies will vote for the remaining nominees and substitute nominees chosen by the Board.

In addition to the information set forth below, Appendix A sets forth information relating to the Company’s directors, the Board’s nominees for election as directors and certain of the Company’s officers who are considered “participants” in our solicitation under the rules of the SEC by reason of their position as directors, nominees or because they will be soliciting proxies on our behalf.

 

The Board of Directors unanimously recommends that you vote FOR the election of each of Dr. Alving and Messrs. Hess, Kleinfeld, Schmidt and Tata on the WHITE proxy card.

 

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Item 1 Election of Directors (continued)

 

 

 

Summary of Director Attributes and Skills

Our directors have a diversity of experience that spans a broad range of industries and in the public and not-for-profit sectors. They bring to our Board a wide variety of skills, qualifications and viewpoints that strengthen the Board’s ability to carry out the Board’s oversight role on behalf of our shareholders. In the director biographies below, we describe certain areas of individual expertise that each director brings to our Board.

The table below is a summary of the range of skills and experiences that each director brings to the Board. Because it is a summary, it does not include all of the skills, experiences, qualifications, and diversity that each director offers, and the fact that a particular experience, skill, or qualification is not listed does not mean that a director does not possess it.

 

 

 

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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: Arconic 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

 

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 Arconic’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: Arconic Inc., Corporate Secretary’s Office, 390 Park Avenue, New York, NY 10022-4608. The deadline for receipt of any shareholder nominations for the 2018 annual meeting is February 15, 2018.

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 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.

 

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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 Governance and Nominating 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 or a shareholder nominating or suggesting 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 Arconic 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 Board’s then current composition and the 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.

Three of the Board’s director nominees approved by the Governance and Nominating Committee for the 2017 Annual Meeting have not previously been elected by shareholders—namely, Dr. Alving and Messrs. Hess and Schmidt. Dr. Alving was initially recommended by the search firm retained by the Governance and Nominating Committee; Mr. Hess was initially recommended by an outside advisor to the Company; and Mr. Schmidt was appointed to the Board in connection with an agreement that the Company entered into on February 1, 2016 with Elliott.

 

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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 Arconic 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 2016, in connection with the separation of Alcoa Inc. into Arconic and Alcoa Corporation, 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, the separation, and Company performance, the committee recommended to the Board, and the full Board approved, the current compensation program for non-employee directors, effective November 1, 2016. Consequently, for the period from November 1, 2016 through December 31, 2016, non-employee directors were compensated under the current compensation program, and for the period from January 1, 2016 through November 1, 2016, non-employee directors were compensated pursuant to the prior non-employee director compensation program, which is described in the Definitive Annual Proxy Statement for the 2016 Annual Meeting of Shareholders of Alcoa Inc., filed with the SEC on March 24, 2016.

Information regarding the retention of Pearl Meyer & Partners can be found under “Corporate Governance—Compensation Consultants” beginning on page 34.

Director Fees

The following table describes the components of compensation for non-employee directors:

 

Annual Compensation Element		2016   Amount
Cash Retainer for Non-Employee Directors		$	120,000
Annual Equity Award for Non-Employee Directors		$	120,000
Other Annual Cash Fees
•   Lead Director Fee		$	25,000
•   Audit Committee Chair Fee (includes Audit Committee Member Fee)		$	27,500
•   Audit Committee Member Fee		$	11,000
•   Compensation and Benefits Committee Chair Fee		$	20,000
•   Other Committee Chair Fee		$	16,500
Stock Ownership Requirement		$	750,000

 

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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 in Arconic 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 Arconic stock until the stock ownership guideline is reached.

Under the director compensation program in effect prior to November 1, 2016, directors who were not in compliance with the ownership value requirement were required to invest at least 50% of the fees they received as directors in Arconic stock until the stock ownership guideline was reached, either by deferring fees into deferred share units under the Company’s 2005 Deferred Fee Plan for Directors or purchasing shares on the open market. Deferred share units provide directors with the same economic interest as if they own Arconic 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 in cash at a value equivalent to the then-prevailing market value of our common stock.

As of November 1, 2016, directors receive a portion of their annual compensation in Arconic deferred restricted share units, which count towards meeting the stock ownership value requirement. The annual deferred restricted share unit award vests on the first anniversary of the grant date, or, if earlier, the date of the next subsequent annual meeting of shareholders following the grant date, subject to continued service through the vesting date (however, accelerated vesting provisions apply for certain termination scenarios, such as death and change in control). Settlement of the annual deferred restricted share units is deferred pursuant to the Amended and Restated Deferred Fee Plan for Directors. Also, as of November 1, 2016, directors may elect to defer the cash portion of their annual compensation into additional Arconic deferred restricted share units (but not into deferred share units), as described under “Director Deferral Program” on page 24. Each Arconic deferred restricted share unit is an undertaking by the Company to issue to the recipient one share of Arconic common stock upon settlement.

Accordingly, whether a director holds shares of Arconic common stock, deferred share units or deferred restricted 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 Arconic common stock, deferred restricted share units, or deferred share units as of February 17, 2017, 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 Arconic Stock, Deferred Share Units or Deferred Restricted Share Units
Amy E. Alving**			2016			$	93,080
Arthur D. Collins, Jr.			2010			$	2,581,502
Rajiv Gupta**			2002			$	93,080
David P. Hess**			2017			$	118,115
Sean O. Mahoney**			2016			$	355,660
E. Stanley O’Neal			2008			$	1,461,851
John C. Plant**			2016			$	523,455
L. Rafael Reif			2015			$	373,067
Julie Richardson**			2016			$	93,080
Patricia F. Russo			2008			$	1,145,912
Ulrich R. Schmidt**			2016			$	318,302
Ratan N. Tata			2007			$	741,918

 

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Director Compensation (continued)

 

 

 

**	Messrs. Mahoney, Plant and Schmidt were appointed to the Board of Directors effective February 5, 2016. Dr. Alving, Mr. Gupta and Ms. Richardson were appointed to the Board of Directors effective November 1, 2016. Mr. Hess was appointed to the Board of Directors effective March 10, 2017.

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.

2016 Director Compensation

The following table sets forth the total compensation of the Company’s non-employee directors for the year ended December 31, 2016.

 

Name1   (a)		Fees Earned or Paid in Cash ($)(b)				Stock Awards($)(c)				All Other Compensation ($)(g)				Total ($)(h)
Amy E. Alving2		$	21,833			$	60,000							$	81,833
Arthur D. Collins, Jr.		$	232,500			$	60,000			$	1,952			$	294,452
Rajiv Gupta2		$	20,000			$	60,000							$	80,000
Sean O. Mahoney3		$	210,083			$	60,000							$	270,083
E. Stanley O’Neal		$	231,000			$	60,000			$	423			$	291,423
John C. Plant3		$	200,000			$	60,000							$	260,000
L. Rafael Reif		$	220,000			$	60,000			$	423			$	280,423
Julie Richardson2		$	21,833			$	60,000							$	81,833
Patricia F. Russo		$	261,500			$	60,000							$	321,500
Ulrich R. Schmidt3		$	204,583			$	60,000							$	264,583
Martin S. Sorrell4		$	220,000			$	60,000							$	280,000
Ratan N. Tata		$	220,000			$	60,000							$	280,000

1	Klaus Kleinfeld is a Company employee and receives no compensation for services as a director; his compensation is reflected in the “2016 Summary Compensation Table.”

2	Amy E. Alving, Rajiv L. Gupta and Julie G. Richardson joined the Board of Directors, effective November 1, 2016.

3	Sean O. Mahoney, John C. Plant and Ulrich R. Schmidt joined the Board of Directors, effective February 5, 2016.

4	Martin S. Sorrell resigned from the Board of Directors, effective March 10, 2017. Due to his resignation, the deferred stock awards reflected in Column (c) will be forfeited.

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 2016, whether or not such fees were deferred.

Stock Awards (Columns (c)). The amounts in this column represent the grant date fair value of deferred restricted share unit awards granted to each non-employee director under the 2013 Arconic Stock Incentive Plan, as amended and restated, on November 30, 2016, computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. The deferred restricted share unit award constitutes the equity portion of each director’s compensation for service from November 1, 2016 until the Company’s annual meeting of shareholders in 2017 and vests over such period. The awards included in this column are the sole stock awards held by non-employee directors as of December 31, 2016. The aggregate number of deferred restricted share units outstanding for each non-employee director as of December 31, 2016 is 3,112.

Option Awards and Non-Equity Incentive Plan Compensation (Columns (d) and (e). In 2016, we did not issue any option awards to directors, and we do not have a non-equity incentive plan for directors. Accordingly, no such compensation is reported and we have omitted columns (d) and (e) from the table.

 

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Director Compensation (continued)

 

 

 

Changes in Pension Value and Nonqualified Deferred Compensation Earnings (Column (f)). The Company does not provide retirement benefits to non-employee directors. The last director to participate in the Company’s Fee Continuation Plan for Non-Employee Directors (which was frozen in 1995) retired from the Board effective May 1, 2015. Further, the Company does not pay above-market or preferential earnings on fees that are deferred. The Amended and Restated 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 changes in pension value or earnings on deferred fees and we have omitted column (f) from the table.

All Other Compensation (Column (g)). The amount shown in this column for Messrs. Collins, O’Neal and Reif represents imputed income related to a 2016 board event. Spouses were invited to attend this event 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.

Director Deferral Program

Prior to November 1, 2016, non-employee directors were able to defer all or part of their cash compensation pursuant to the Company’s 2005 Deferred Fee Plan for Directors (or a predecessor plan) and to invest any such deferred amounts into Arconic deferred share units or into the other investment options provided under the Company’s 401(k) tax-qualified savings plan.

As of November 1, 2016, in connection with the adoption of the changes to the director compensation program recommended by Pearl Meyer & Partners, the Board of Directors adopted the Amended and Restated Deferred Fee Plan for Directors. Under the Amended and Restated Deferred Fee Plan for Directors, non-employee directors may elect to defer all or part of the cash portion of their annual compensation and to invest such deferred amounts into fully-vested Arconic restricted share units or into the investment options provided under the Company’s 401(k) tax-qualified savings plan other than the Arconic Stock Fund (which represents Arconic deferred share units). The annual equity award granted to non-employee directors in the form of Arconic restricted share units is, by its terms, deferred under the Amended and Restated Deferred Fee Plan for Directors.

Deferred amounts are paid either in a lump sum or installments, as elected by the director, upon retirement from the Board of Directors.

 

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Corporate Governance

 

Arconic 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 Companies        FORTUNE Magazine, 2017     •   Deal of the Year        Platts Global Medal Awards, 2016				•   Aluminum Industry Leader for Dow Jones World Index        Dow Jones Sustainability Indices, 2016
				Research and Development     •   R&D 100 Award        R&D Magazine, 2016

 

*	Includes awards received by Alcoa Inc., the predecessor to Arconic.

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

 

Board Membership and Participation     •     Directors who serve on our audit committee may serve on only two other public companies’ audit committees.     •     Directors who serve as chief executive officers of public companies should not serve on more than two outside public company boards in addition to the Arconic Board.     •     Otherdirectors should not serve on more than four outside public company boards in addition to the Arconic Board.     •     Directors’attendance at annual meetings is expected.     Prohibition against Short Sales, Hedging, Margin Accounts and Pledging     Our Insider Trading Policy contains restrictions that, among other things:     •     prohibitshort sales of Arconic securities and derivative or speculative transactions in Arconic securities;     •     prohibitthe use of 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 Arconic securities; and     •     prohibitdirectors and executive officers from holding Arconic securities in margin accounts or pledging Arconic securities as collateral.     Shareholder Engagement Our directors and executive officers value direct and recurring engagement with our shareholders as part of our continuing efforts to create shareholder value, to refine our corporate governance practices and to address any shareholder concerns. We have sought additional opportunities to meet with, and receive input from, our shareholders, including through Arconic’s first-ever “Investor Day” held in December 2016, and we intend to continue to seek such opportunities in the future.

Proxy Access Shareholders may nominate director candidates to Arconic’s Board and include those nominees in Arconic’s proxy statement in accordance with the Company’s By-Laws.   Shareholders’ Right to Call Special Meetings Shareholders are permitted to call special meetings in accordance with the Company’s Articles of Incorporation and By-Laws.   Shareholders’ Action by Written Consent Shareholders may act by written consent in accordance with the Company’s Articles of Incorporation and By-Laws.   Commitment to Sustainability The Company is committed to operating sustainably in the communities in which we do business.

 

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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. Arconic 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, review and oversight of the Company’s strategy, businesses, and operating and financial performance.

 

•

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

 

•

The structure allows for open and effective communication between executives and the Board, as well as 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 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.

Patricia F. Russo is our current Lead Director. Ms. Russo’s strength in leading the Board is complemented by her depth of experience in Board matters ranging from her service on the Company’s Compensation and Benefits Committee (including as Chair from May 2011 to May 2015), Governance and Nominating Committee (as the current Chair) and Executive Committee to her memberships on other company boards.

 

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Corporate Governance (continued)

 

 

 

Shareholders’ interests are protected by 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.   •   7 out of 12 independent directors have joined the Board since February 2016, providing new independent oversight and diverse leadership experience.   •   The Board’s key standing committees are composed solely of independent directors. The Audit Committee, the Compensation and Benefits Committee, the Finance Committee and the Governance and Nominating Committee each comprises 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 Company’s corporate governance practices and policies are designed to protect shareholders’ long-term interests.

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.

 

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The Audit Committee regularly reviews treasury risks (including those relating to cash generation, liquidity, pension funded status, insurance, credit, debt, interest rates and foreign currency exchange rates), financial and accounting risks, legal and compliance risks, and risks relating to information technology including cybersecurity, tax matters, environmental remediation, and internal controls.

The Cybersecurity Advisory Subcommittee was established by the Audit Committee to assist the Audit Committee in fulfilling its responsibility of reviewing the Company’s enterprise risk relating to cybersecurity.

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 62.

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 Finance Committee reviews and provides advice and counsel to the Board regarding the Company’s capital structure, capital expenditures, financing and mergers and acquisitions activities and the risks relating to such activities.

The International Committee considers risks posed by global developments.

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		•   Aerospace Industry Experience		•   Technology/Innovation Expertise
•   International Experience		•   Risk Management Expertise		•   Corporate Governance Expertise
•   Finance Experience		•   Manufacturing/Industrial Experience		•   Human Resources Experience
•   Economics Expertise		•   Government Experience		•   Defense Industry Experience
•   Academia •   Automotive Industry Experience		•   Environmental and Sustainability Experience •   Engineering Experience		•   Information Technology Experience

 

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Corporate Governance (continued)

 

 

 

 

Board Meetings and Attendance

 

The Board met 11 times in 2016. Attendance by directors at Board and committee meetings averaged 93%. 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 2016 (or, in the case of Dr. Alving and Ms. Richardson, and Messrs. Gupta, Mahoney, Plant and Schmidt, each of whom joined the Board in 2016, 75% or more of the aggregate of all such meetings after joining the Board), with the exceptions of Messrs. Reif and Sorrell. Messrs. Reif and Sorrell attended 71% and 63%, respectively, of such meetings as a result of the unusually high number of meetings held in 2016 in connection with the separation transaction and other matters and their respective significant other professional commitments.

Under Arconic’s Corporate Governance Guidelines, all directors are expected to attend the annual meeting of shareholders. Eleven out of the fifteen members of the Board at the time attended the Company’s 2016 annual meeting. In addition to Board meetings, directors visit Arconic business operations to deepen their understanding of the Company and interact with on-site employees. 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.

 

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Committees of the Board

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

Each of the Audit, Compensation and Benefits, Governance and Nominating and Finance 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).

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

 

Audit

Compensation     and Benefits

Governance and     Nominating

Finance

Executive

International

Amy E. Alving*1

X

Arthur D. Collins, Jr.*1

Chair

Rajiv L. Gupta*

X

X

X

David P. Hess*2

Klaus Kleinfeld

Chair

Chair

Sean O. Mahoney*

X

Chair

X

E. Stanley O’Neal*

X

X

X

X

John C. Plant*

X

L. Rafael Reif*

X

Julie G. Richardson*

X

X

Patricia F. Russo*

X

Chair

X

Ulrich R. Schmidt*

Chair

X

X

X

Ratan N. Tata*

X

2016 Meetings

9

10

17

N/A3

12

3

*	Independent Director

1	Mr. Collins was Chair of the Cybersecurity Advisory Subcommittee until October 31, 2016 and Dr. Alving was appointed Chair effective November 1, 2016.

2	Mr. Hess, an Independent Director, was appointed to the Board of Directors, effective March 10, 2017, and has not yet been appointed to one or more Board committees.

3	The Finance Committee was established effective February 23, 2017.

 

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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 except for Dr. Alving qualifies as an “audit committee financial expert” under applicable SEC rules.
Cybersecurity Advisory Subcommittee		•    Assists the Audit Committee in regularly reviewing the state of the Company’s cybersecurity
		•    Regularly brings cybersecurity developments or issues to the attention of the 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” 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.
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 •    Oversees an annual performance review of the Board, Board committees and individual director nominees •    Periodically reviews and makes recommendations to the Board regarding director compensation

 

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COMMITTEE		RESPONSIBILITIES
Finance Committee		•    Reviews and provides advice and counsel to the Board regarding the Company’s: •   capital structure; •   financing transactions; •   capital expenditures and capital plan; •   acquisitions and divestitures; •   share repurchase and dividend programs; •   policies relating to interest rate, commodity and currency hedging; and •   employee retirement plans.
Executive Committee		•    Has the authority to act on behalf of the Board during the intervals between regularly scheduled Board meetings when Board action is needed, except as otherwise limited by law and subject to the limitations set forth in the Executive Committee charter.
International Committee		•    Provides a forum for additional discussion and input on international markets, business conditions and political developments.

Voting for Directors

Arconic’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. 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.

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. Elliott has notified Arconic that Elliott intends to nominate a slate of four nominees for election to the Board at the 2017 Annual Meeting in opposition to the nominees recommended by the Board. In that case, the five candidates for election as directors receiving the highest number of FOR votes will be elected at the 2017 Annual Meeting.

Communications with Directors

The Board of Directors is committed to meaningful engagement with Arconic shareholders and 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 Arconic 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 Arconic 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 Arconic’s Integrity Line at 855-585-8256. For a listing of Integrity Line telephone numbers outside the United States, go to http://www.arconic.com “Who We Are—How We Work—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.

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.

 

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Corporate Governance (continued)

 

 

 

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;

(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%;

 

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(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 2016

 

Based on information provided by the directors, the executive officers, and the Company’s 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 2016, 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.” 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).

In addition, during 2016, 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;

 

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Corporate Governance (continued)

 

 

 

•

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).

Corporate Governance Materials Available on Arconic’s Website

The following documents, as well as additional corporate governance information and materials, are available on our website at http://www.arconic.com under “Investors—Corporate Governance—Governance and Policies”:

 

•

Articles of Incorporation

 

•

By-Laws

 

•

Corporate Governance Guidelines

 

•

Business Conduct Policies

 

•

Code of Ethics for the CEO, CFO and Other Financial Professionals

 

•

Director Independence Standards

 

•

Board Confidentiality Policy

 

•

Related Person Transaction Approval Policy

 

•

Charters of each of our Board committees and subcommittee

 

•

Insider Trading Policy

Copies of these documents are also available in print form at no charge by sending a request to Arconic Inc., Corporate Communications, 201 Isabella Street, Pittsburgh, PA 15212-5858.

Information on our website is not, and will not be deemed to be, a part of this proxy statement or incorporated into any of our other filings with the SEC.

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.arconic.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 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

 

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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 Arconic 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 2009 and 2013 Arconic Stock Incentive Plans, the Incentive Compensation Plan for annual cash incentives and the Arconic Internal Revenue Code Section 162(m) Compliant Annual Cash Incentive Compensation Plan each incorporate the terms of this policy.

Other Matters

On August 18, 2016, as part of the resolution of a working capital adjustment in connection with Arconic’s acquisition of Firth Rixson, Oak Hill Capital Partners II, L.P. and Oak Hill Capital Management Partners III, L.P. (the “Oak Hill Parties”) agreed to a limited voting commitment for a period of two years ending August 18, 2018 with respect to Arconic common stock beneficially owned by the Oak Hill Parties and certain of their affiliates as of the applicable record date for a vote or consent of Arconic’s stockholders. Accordingly, pursuant to this limited commitment (which does not restrict the sale of the shares), the Oak Hill Parties and certain of their affiliates are required to vote any shares of Arconic common stock that they beneficially own as of the record date in favor of the election of directors nominated by the Board and in accordance with the Board’s recommendation on all other proposals to be voted upon at the Annual Meeting.

 

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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 2016 all of its directors and executive officers filed the required reports on a timely basis under Section 16(a).

Arconic 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 Arconic common stock as of December 31, 2016, except as noted below.

 

Name and Address of Beneficial Owner		Title of Class		Amount and Nature of     Beneficial Ownership (#)		Percent     of Class
Elliott Associates, L.P.    40 West 57th Street    New York, NY 10019   Elliott International, L.P.    c/o Maples & Calder    P.O. Box 309    Ugland House, South Church Street George Town    Cayman Islands, British West Indies   Elliott International Capital Advisors Inc.    40 West 57th Street    New York, NY 10019   Christopher L. Ayers    2400 W. 75th Street    Prairie Village, Kansas 66208   Elmer L. Doty    24 Robledo Drive    Dallas, Texas 75230   Charles M. Hall    111 Faison Road    Chapel Hill, North Carolina 27517   Bernd F. Kessler    Burgstrasse 10    82064 Strasslach, Germany		Common Stock		51,102,1331		11.6%
Patrice E. Merrin    92 Birch Avenue    Toronto, Ontario M4V1C8

 

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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		40,317,2532		9.19%
Blackrock, Inc.    55 East 52nd Street    New York, NY 10022		Common Stock		32,493,0633		7.4%

1

As of March 10, 2017; as reported in a Schedule 13D amendment dated March 10, 2017: Elliott Associates L.P. had sole power to vote and dispose of 16,352,683 shares; Elliott International, L.P. had shared power to vote and dispose of 34,749,450 shares; Elliott International Capital Advisors Inc. had shared power to vote and dispose of 34,749,450 shares; Christopher L. Ayers had sole power to vote and dispose of 100 shares; and each of Elmer L. Doty, Charles M. Hall, Bernd F. Kessler and Patrice E. Merrin did not beneficially own any shares. In addition, these Elliott entities collectively had economic exposure comparable to approximately 1.6% of the shares of common stock outstanding pursuant to certain derivative agreements disclosed in the Schedule 13D amendment.

2

As reported in a Schedule 13G amendment dated February 9, 2017. The Vanguard Group, an investment adviser, reported that it had sole power to vote 682,187 shares, sole power to dispose of 39,544,956 shares, shared power to vote 94,567 of the reported shares, and shared power to dispose of 772,297 shares.

3	As reported in a Schedule 13G amendment dated January 18, 2017. BlackRock, Inc., a parent holding company, reported that it had sole power to vote 28,389,853 shares, sole power to dispose of 32,452,092 shares, and shared power to vote and dispose of 40,971 shares.

Stock Ownership of Directors and Executive Officers

The following table shows the ownership of Arconic common stock, as of February 17, 2017, by each director, each of the named executive officers, and all directors and executive officers (serving as of March 13, 2017) as a group.

Mr. Kleinfeld is required to own shares of Arconic 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 Arconic 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 in Arconic 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 Arconic stock until the stock ownership guideline is reached.

Deferred Share Units. Under the director compensation program in effect prior to November 1, 2016, directors who were not in compliance with the stock ownership value requirement were required to invest at least 50% of the fees they received as directors in Arconic stock, either by deferring fees into deferred share units under the Company’s 2005 Deferred Fee Plan for Directors or purchasing shares on the open market. Deferred share units provide directors with the same economic interest as if they own Arconic common stock. Upon a director’s retirement from the Board, the deferred share units are settled in cash at a value equivalent to the then-prevailing market value of our common stock.

In addition, certain employees may elect to defer a portion of their salaries into Arconic deferred share units under the Arconic Deferred Compensation Plan.

Deferred Restricted Share Units. As of November 1, 2016, directors receive $120,000 of their annual compensation in Arconic deferred restricted share units, which count towards meeting the stock ownership value requirement. The annual deferred restricted share units vest on the first anniversary of the grant date, or, if earlier, the date of the next subsequent annual meeting of shareholders following the grant date, subject to continued service through the vesting date (with certain limited exceptions). Also, as of November 1, 2016, directors may elect to defer the cash portion of their annual compensation into additional Arconic deferred restricted share units. Deferred restricted share units granted in lieu of cash compensation pursuant to a director’s deferral election are fully vested at grant.

Each Arconic deferred restricted share unit is an undertaking by the Company to issue to the recipient one share of Arconic common stock upon settlement. Deferred amounts are paid either in a lump sum or installments, as elected by the director, upon retirement from the Board of Directors.

 

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Arconic Stock Ownership (continued)

 

 

 

For more information, see “Director Compensation—Directors’ Alignment with Shareholders.”

 

Name of Beneficial Owner		Shares of Common Stock1				Deferred Share Units2				Deferred Restricted Share Units3				Total
Directors
Amy E. Alving			—				—				3,112				3,112
Arthur D. Collins, Jr.			16,667				66,530				3,112				86,309
Rajiv L. Gupta			—				—				3,112				3,112
David P. Hess			3,949				—				—  4				3,949
Sean O. Mahoney			—				8,779				3,112				11,891
E. Stanley O’Neal			—				45,763				3,112				48,875
John Plant			10,0005				4,389				3,112				17,501
L. Rafael Reif			—				9,361				3,112				12,473
Julie G. Richardson			—				—				3,112				3,112
Patricia F. Russo			3,3336				31,867				3,112				38,312
Ulrich R. Schmidt			3,333				4,197				3,112				10,642
Ratan N. Tata			21,693				—				3,112				24,805
Named Executive Officers
Klaus Kleinfeld*			2,298,326				12,754				—				2,311,080
Kenneth J. Giacobbe			18,653				—				—				18,653
William F. Oplinger			43,379				941				—				44,320
Christoph Kollatz			—				—				—				—
Kay H. Meggers			282,868				292				—				283,160
Karl Tragl			—				—				—				—
Olivier Jarrault			141,963				—				—				141,963
Audrey Strauss			236,108				1,044				—				237,152
All Directors and Executive Officers as   a Group (21 individuals)			2,746,140				200,715				34,232				2,981,087

*	Also serves as a director

1

This column shows beneficial ownership of Arconic 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 Arconic 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 Arconic Retirement Savings Plan which confer voting rights through the plan trustee with respect to shares of Arconic common stock. This column also includes shares of Arconic common stock that may be acquired under employee stock options that are exercisable as of February 17, 2017 or will become exercisable within 60 days after February 17, 2017 as follows: Mr. Kleinfeld (1,657,527); Mr. Giacobbe (5,040); Mr. Meggers (194,696); Mr. Jarrault (60,382); and Ms. Strauss (172,622); and all executive officers as a group (1,912,227). No awards of stock options have been made to non-employee directors. As of February 17, 2017, 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.

2

This column lists (i) for executive officers, deferred share equivalent units held under the Arconic Deferred Compensation Plan, and (ii) for directors, deferred share equivalent units held under the Amended and Restated 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 Arconic common stock and is fully vested upon grant, but does not have voting rights.

3

This column lists deferred restricted share units issued under the 2013 Arconic Stock Incentive Plan, as amended and restated. Each deferred restricted share unit is an undertaking by the Company to issue to the recipient one share of Arconic common stock upon settlement. The annual deferred restricted share units vest on the first anniversary of the grant date, or, if earlier, the date of the next subsequent annual meeting of shareholders following the grant date,

 

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Arconic Stock Ownership (continued)

 

 

 

subject to continued service through the vesting date (with certain limited exceptions). Deferred restricted share units granted in lieu of cash compensation pursuant to a director’s deferral election are fully vested at grant.

4

Mr. Hess was appointed to the Board of Directors effective March 10, 2017. The initial disbursement of his director compensation will be made on March 10, 2017. Under Arconic’s director compensation program, Mr. Hess will receive an annual retainer of $240,000, plus any applicable Board committee fees, of which $120,000 shall be in deferred restricted share units. See “Director Compensation” on page 21.

5	Held by a trust of which Mr. Plant is the trustee and a beneficiary.

6	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 2017. 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 2017.

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 2016 (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

 

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

 

 

 

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.

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, 2016, 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 2017.

The Audit Committee

Ulrich R. Schmidt, Chair

Amy E. Alving

Sean O. Mahoney

E. Stanley O’Neal

Julie G. Richardson

February 22, 2017

 

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

 

 

 

Audit and Non-Audit Fees

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

 

		2016		2015
Audit Fees		$ 14.7		$ 13.8
Audit-Related Fees		$   5.1		$   5.5
Tax Fees		$   0.3		$   0.5
All Other Fees		$   0.0		$   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 2015 to 2016 was principally due to fees paid to PwC through November 1, 2016 relating to the audit of the financial statements of the Alcoa Corporation business in anticipation of the separation.

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. This category also includes fees associated with the audit and review by PwC of carve-out financial statements of the Alcoa Corporation business. The decrease in audit-related fees from 2015 to 2016 was principally due to a decrease in the amount of due diligence work performed.

Tax Fees include U.S. federal, state and local tax support and international tax support.

All Other Fees include benchmarking services across a number of Arconic entities.

 

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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 2016 compensation of the individuals listed in the “2016 Summary Compensation Table” on page 65 (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. Item 4 (Advisory Vote on Frequency of Advisory Vote on Executive Compensation) of this Proxy Statement asks for shareholder feedback on the Board’s current policy of an annual frequency for advisory shareholder votes to approve executive officer compensation. If, following the vote on that proposal, the annual frequency is retained, unless the Board determines otherwise, the next such vote will be held at the Company’s 2018 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.

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 2017 annual meeting of shareholders.

The Compensation and Benefits Committee

Arthur D. Collins, Jr., Chair

Rajiv L. Gupta

John C. Plant

Patricia F. Russo

February 22, 2017

 

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Executive Compensation | Compensation Discussion and Analysis (continued)

 

 

 

Compensation Discussion and Analysis

This Compensation Discussion and Analysis (CD&A) describes the compensation and benefits of our named executive officers (our NEOs) with respect to our fiscal year 2016 and the related decisions made by the Compensation and Benefits Committee (the Compensation Committee) of the Board of Directors of Alcoa Inc. (with respect to decisions made prior to the separation) and Arconic Inc. (with respect to decisions made after the separation). For 2016, our NEOs are:

Klaus Kleinfeld, Chairman and Chief Executive Officer

Kenneth J. Giacobbe, Executive Vice President and Chief Financial Officer

William F. Oplinger, Former Executive Vice President and Chief Financial Officer

Christoph Kollatz, Executive Vice President, Corporate Development, Strategy & New Ventures

Kay H. Meggers, Executive Vice President and Group President, Global Rolled Products

Karl Tragl, Executive Vice President and Group President, Engineered Products and Solutions

Olivier Jarrault, Former Executive Vice President and Group President, Engineered Products and Solutions

Audrey Strauss, Former Executive Vice President, Chief Legal Officer and Secretary

Executive Summary

 

Executive Compensation Program Aligns Management Interests with Those of Shareholders in a Transformative Year

On November 1, 2016, Alcoa Inc. separated into two independent public companies, Alcoa Corporation and Arconic Inc.

Following the separation, Arconic comprises the Global Rolled Products (other than the rolling mill in Warrick, Indiana, and the 25.1% equity ownership stake in the Ma’aden Rolling Company), the Engineered Products and Solutions, and the Transportation and Construction Solutions segments. Alcoa Corporation comprises the Alumina and Primary Metals segments, the rolling mill in Warrick, Indiana, and the 25.1% equity ownership stake in the Ma’aden Rolling Company in Saudi Arabia. References in this CD&A to “Alcoa Inc.” refer to the combined company prior to the separation; references to “Arconic” refer to Arconic Inc. following the separation; and references to the “Company” refer generally to the entity as it existed throughout 2016 (for 10 months as Alcoa Inc. and two months as Arconic).

While the Company delivered solid operational and financial performance in 2016, a shortfall against targets resulted in payouts that were below target for long-term incentive (LTI) and slightly below target for annual incentive compensation (IC), consistent with the Company’s pay-for-performance practices.

During 2016, the Company exceeded its free cash flow (FCF) targets, while also reducing debt by $750 million and finishing the year with $1.9 billion in cash and the 19.9% stake in Alcoa Corporation worth approximately $1 billion. Despite significant productivity savings across every segment and profit and margin increases in all three Arconic segments, the Company missed achieving its 2016 adjusted Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) and revenue targets due to unanticipated declines in the aerospace and ground transportation markets. In line with the Company’s pay-for-performance policy, missing those targets resulted in a below target LTI payout and slightly below target IC payout.

Critical strategic decisions and strong project management drove the success of the separation and created significant shareholder value.

To address an unusually low commodity pricing environment at the time of the separation, which resulted in a reduced debt-carrying capacity of Alcoa Corporation, Arconic took on an extra debt burden. This enabled Alcoa Corporation to start with a strong balance sheet built to weather commodity cycles and has had a positive impact on Alcoa Corporation’s ability to create value for its shareholders. In order to counterbalance this increased burden, Arconic retained a 19.9% stake in Alcoa Corporation and is responsibly managing it to maximize shareholder value. On February 14, 2017, Arconic reduced its stake by more than 60%, selling 23 million shares of Alcoa Corporation stock. The Company will use the $888 million in proceeds to strengthen Arconic’s cash balance, which provides financial flexibility to pay down debt and/or pursue share repurchases, based on an assessment of relative return.

 

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Executive Compensation | Compensation Discussion and Analysis (continued)

 

 

 

To oversee the complex separation process, Alcoa Inc. formed a Separation Program Office that managed 294 projects affecting 266 sites in 27 countries. The separation was completed on schedule and on budget, with two highly qualified leadership teams ready on November 1, 2016 to assume responsibility for Alcoa Corporation and Arconic.

The separation has enhanced the respective businesses of Arconic and Alcoa Corporation and unlocked substantial value for their shareholders. Within the first 100 days, the pre-split shareholders of Alcoa Inc. have seen their investment increase in value by a combined 52.9% (including dividends) from the closing price on November 1, 2016. Arconic’s stock price has increased by 47.8% over that period.

The Compensation Committee decided not to have special separation awards for NEOs and to provide equity adjustments only for selected NEOs who had an outstanding impact on the separation results.

Based on input from investors and benchmarking analyses, the Company designed an executive compensation structure most suited to drive shareholder value for Arconic in 2017 and beyond.

The separation presented an opportunity to focus executive compensation practices on Arconic’s unique needs and opportunities. During 2015 and 2016, the Company’s directors and management took advantage of the expanded dialogue with investors concerning separation plans to also obtain investor insights related to their policies on compensation and governance matters and to obtain their comments on our 2016 Alcoa Inc. compensation plans and recommendations for compensation practices to be adopted by Arconic after the separation. In addition, Arconic management and the Compensation Committee reviewed the best practices of comparable companies in terms of compensation design and mix, short-term and long-term performance metrics, long-term incentive mix by award type, performance periods, vesting provisions, short-term and long-term incentive payout history, and stock ownership guidelines. All of these inputs resulted in revisions to the 2017 compensation design described in this CD&A and summarized below.

 

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Executive Compensation | Compensation Discussion and Analysis (continued)

 

 

 

Arconic’s compensation practices respond to investor/ISS feedback and best practices

 

 

 

Shareholder/ISS Feedback & Best Practices From Market Study*		Our Responses/Changes
Emphasize performance-based equity awards		80% of equity awards for CEO/NEOs based on performance, the highest percentage in the market study
Minimize adjustments to incentive plan results		For the 2-months post-separation in 2016 and in future years, incentive plan results not normalized for LME
Establish long-term targets for performance restricted share units (RSUs)		Beginning in 2017, performance RSUs earned based on 3-year targets set at beginning of 3-year performance period
Consider incentive metrics that are strongly linked to shareholder value and based on relative performance		Beginning in 2017, implemented new incentive compensation structure, including:   •    A return metric (return on net assets) for the performance RSUs   •    A relative TSR multiplier for the performance RSUs   •    Reduced weighting on non-financial metrics under the annual incentive plan from 20% to 10%
Remove grandfathered change-in-control (CIC) provisions to align with best practices		Eliminated the CEO’s grandfathered excise tax gross-up and modified single trigger provisions under the Change in Control Severance Plan

 

*	Market study of 17 companies in Arconic’s new CEO peer group

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 CD&A, including adjusted net income, adjusted EBITDA, and free cash flow.

Compensation Design and Philosophy

 

The Company’s Compensation Philosophy and Investor Outreach Guided the 2016 Executive Compensation Plan and the Executive Compensation Plan and Practices Adopted for Arconic

Arconic’s Executive Compensation Design, as discussed in greater detail below in this CD&A, relies on a diversified mix of pay instruments, including a fixed base salary, a performance-based annual incentive program, and a long-term equity incentive program which itself consists of multiple components. The incentive programs are designed to reward achievement in respect of various performance metrics, all of which are of great importance to building shareholder value.

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

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

2.	Choose annual IC and LTI metrics that focus management’s actions on achieving the greatest positive impact on Arconic’s financial performance and that include a means to assess and motivate performance relative to peers.

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.

 

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Executive Compensation | Compensation Discussion and Analysis (continued)

 

 

 

Our 2016 executive compensation plans reflect our continued investor outreach efforts.   In the fall of 2015, the Company reached out to governance and compensation professionals at all of our largest 50 investors. We had calls or meetings with 21 of those investors to determine their priorities for the 2016 proxy season and to answer their questions about the Company’s compensation and governance practices. The CEO and CFO also had compensation and governance discussions during their meetings with equity investors. With 89% of the votes cast at the 2016 shareholders meeting in favor of our say-on-pay proposal, on an advisory basis, our investors reinforced their support of our compensation philosophy and plan.

Equity represents a significant portion of the compensation of the CEO and the other NEOs.

 

 

The emphasis on equity compensation and pay-for-performance begins with the CEO, whose 2016 target total direct compensation included nearly 90% pay at risk.

The 2016 target total direct compensation for the other continuing NEOs covered in this document also had a strong emphasis on performance-based compensation.

 

Type of Compensation		% of Target Compensation
Salary		18% to 37%
Annual Cash Incentive Compensation		17% to 25%
Equity Awards		38% to 64%

The Company Delivered Solid Operational and Financial Performance in 2016

The Company improved year-over-year performance results.

Excluding the impact of special items, Arconic reported 2016 adjusted income from continuing operations of $505 million, or $0.98 per share.

Full year 2016 combined segment adjusted EBITDA was $2.1 billion, up 9% year over year, with the Company recording a margin expansion of 140 basis points across all business segments. Full year 2016 consolidated adjusted EBITDA, excluding separation costs, was $1.7 billion. Company employees achieved $710 million in gross productivity savings, with net savings of $310 million.

To further its de-leveraging program and strengthen its balance sheet, in December 2016, Arconic completed the early redemption of bonds in the aggregate principal amount of $750 million, ending the year with cash on hand of $1.9 billion and retained interest in Alcoa Corporation worth approximately $1 billion.

 

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Executive Compensation | Compensation Discussion and Analysis (continued)

 

 

 

The 2016 performance of Alcoa Inc.’s Upstream business, Global Primary Products (GPP), was impacted by declining alumina prices and regional premiums.

GPP is a globally cost-competitive leader in the production of bauxite, alumina and aluminum, bolstered by a portfolio of value-added cast and rolled products as well as energy assets. The business delivered third-party revenue of $5.9 billion for the 10-month period January to October 2016, down 23% versus the prior year, along with $318 million in after-tax operating income (ATOI), down 63% versus prior year. Revenue results were heavily impacted by declining alumina prices and regional premiums as well as divestitures. Substantial productivity initiatives of over $575 million were not enough to offset these market factors, leading to the drop in ATOI.

Arconic’s Segments Continued to Deliver Strong Performance in 2016. Arconic has continued to improve its profitability, with combined segment adjusted EBITDA margin increasing from 6.9% in 2008 to 16.6% in 2016. Every Arconic segment has also seen impressive margin growth over this time period:

 

•

EPS: Increased adjusted EBITDA percentage margin from 13% to 21%

 

•

GRP: Increased adjusted EBITDA percentage margin from 3% to 12%; adjusted EBITDA/metric ton (MT) from $113 to $364

 

•

TCS: Increased adjusted EBITDA percentage margin from 6% to 16%

Combined segment adjusted EBITDA was up 9% in full year 2016, with margin expansions in every segment.

EPS develops and manufactures high performance, engineered products and solutions for the aerospace, industrial gas turbine, commercial transportation and oil and gas markets. EPS recorded revenue of $5.7 billion, up 7% year over year, ATOI of $642 million, up 8% year over year, adjusted EBITDA of $1.2 billion, up 8% year over year and an adjusted EBITDA margin of 20.9%. EPS businesses secured landmark contracts in 2016, including three with Airbus, for 3D-printed metal parts.

GRP manufactures highly-differentiated aluminum sheet and plate products for the aerospace, automotive, commercial transportation, brazing and industrial markets. GRP recorded revenue of $4.9 billion, down 7% year over year, ATOI of $269 million, up 20% year over year, adjusted EBITDA of $577 million, up 13% year over year, and adjusted EBITDA of $364 per metric ton. GRP also continued to benefit from the aluminization of the automotive market: in 2016, automotive sheet shipments increased 40% year over year. Automotive sheet revenue is expected to grow from $117 million in 2011 to $1.3 billion in 2018.

TCS brands invented the industries they continue to lead today: Kawneer created the first modern storefront more than a century ago, while the Alcoa Wheels brand created the first forged aluminum truck wheel nearly 70 years ago. In 2016, TCS recorded revenue of $1.8 billion, down 4% year over year, ATOI of $176 million, up 6% year over year, adjusted EBITDA of $291 million, up 7% year over year, and an adjusted EBITDA margin of 16.1%.

In 2017, Arconic’s segment reporting metric will change from ATOI to adjusted EBITDA.

The Separation Strategy, Design and Management Delivered Significant Value for Shareholders

The Company completed the separation on schedule and on budget. To ensure that the Company’s business units could focus on delivering on their customer and financial commitments without distraction from separation activities, the Company formed a Separation Project Office (SPO) to maintain tight cross-functional coordination over 35 workstreams with more than 20,000 milestones involving 294 projects affecting 266 sites in 27 countries. Under the direction of the SPO, the functional leaders renegotiated vendor contracts valued at $2.7 billion, trained more than 12,000 employees to provide post-separation continuity to customers and oversaw a massive information technology (IT) restructuring. The separation required a new global data center for Alcoa Corporation, separation of all regional internet gateways, and creation of 275 new servers. Two highly qualified leadership teams were ready on November 1, 2016 to assume responsibility for Alcoa Corporation and Arconic.

At separation, Alcoa Corporation started with a strong balance sheet enabled by Arconic taking debt and a 19.9% retained interest. Due to the unusually low commodity pricing environment at the time of the separation, which would result in a strongly reduced debt-carrying capacity of Alcoa Corporation, Arconic took on an extra debt burden to allow for the separation to conclude on time and for Alcoa Corporation to start with a strong balance sheet built to weather commodity

 

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cycles. As a counter position, Arconic retained a 19.9% stake in Alcoa Corporation, with the intention of managing it to maximize the upside for our shareholders. On February 14, 2017, after a 67.7% rise in Alcoa Corporation stock, Arconic monetized more than 60% of its stake resulting in proceeds of $888 million. The proceeds strengthen Arconic’s cash balance, which provides financial flexibility to pay down debt and/or pursue share repurchases, based on an assessment of relative return.

The separation delivered substantial shareholder value. The separation has enhanced the respective businesses of Arconic and Alcoa Corporation and unlocked significant value for their shareholders. Within the first 100 days, the pre-split shareholders of Alcoa Inc. have seen their investment increase in value by a combined 52.9% (including dividends) from the closing price on November 1, 2016. Arconic’s stock price has increased by 47.8% over that period, significantly more than the 12.6% increase of the S&P Industrial Index or the 14% increase of the S&P Aerospace and Defense Index.

The Company Set Aggressive Short- and Long-Term Business Plan Targets That Formed the Basis for Its IC and LTI Targets

The IC and LTI targets are based on corporate and business plan targets, which are publicly disclosed. In recent years, the targets were consistent with the Company’s overall strategy to build a globally competitive commodity business while profitably growing our value-add business.

Because of the diversity of Alcoa Inc.’s businesses, in recent years, including 2016, three-year business plans targets took 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. Targets were set to lower Alcoa’s position on the industry cost curves by the year in which the targets end. The midstream and downstream businesses have targets for profitable growth. In 2016, the targets for the midstream business were adjusted EBITDA/MT and revenue growth, and for the downstream, adjusted EBITDA margin percentage and revenue growth.

The three-year targets ending in 2016 were set based on consideration of the following parameters:

1.	Market/competitive positioning, both current and projected;

2.	Competitor financial benchmarking;

3.	Market conditions, both current and projected; and

4.	Historical performance.

The Company conducted a rigorous, iterative annual operational planning process that considered 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 the prices of aluminum on the London Metal Exchange (LME), 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 group’s business plan was 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 was compared with the financial position of the Company in the aggregate to determine whether the targets meet our financial ratio and cash requirements. As in previous years, the final result was the 2016 annual business plan.

This rigorous process has allowed the Company to establish one-year and three-year business plan goals on which to base its IC and LTI targets. The annual business plan interacts with the three-year targets as progress points for the long-term goals, driving long-term value for the Company’s shareholders. This process drove the multi-year productivity gains and increases in profitable growth that facilitated Alcoa Inc.’s transformation strategy and successful separation.

Framework for the 2016 Incentive Structure. Anticipating the completion of the separation in the second half of 2016, the Compensation Committee established a framework for measuring performance under the 2016 IC and performance-based

 

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restricted share unit awards both prior to and after the separation. Targets were set for 2016 performance of Alcoa Inc. and for Arconic. For additional information see “—2016 Annual Cash Incentive Compensation” and “—2016 Equity Awards: Stock Options and Performance-Based Restricted Share Units.”

The Company Chose 2016 Metrics That Drive Long-Term Economic Value, and IC and LTI Targets that Drove Solid Performance

Our choice of 2016 metrics was directly related to the key priorities of our businesses and aligned with our shareholders. Alcoa Inc. consistently chose IC metrics that motivate high performance in the current market environment and LTI metrics that are aligned with its long-term strategy.

 

•

Financial metrics represented 80% of the total IC target. In 2016, Alcoa Inc.’s financial IC metrics were 40% for adjusted EBITDA to represent investor priorities for profitable growth and 40% for adjusted free cash flow (FCF) to maintain a focus on liquidity leading up to the separation.

 

•

Non-financial metrics represented 20% of the total IC target. Safety, environmental stewardship and diversity are intrinsic to Alcoa Inc.’s values and have an impact on business performance. The safety metric focuses on reducing the number of serious injuries. Given the significant environmental impact of the Upstream portfolio, the environmental metric drives reduction of carbon dioxide emissions and strengthening Alcoa Inc.’s energy efficiency. Our diversity metric tracks executive and professional representation of women globally and of minorities in the United States, reinforcing our goal to draw on the broadest possible talent pool in attracting the best and brightest to Alcoa and building on diverse viewpoints.

 

•

Long-term metrics. Alcoa Inc.’s LTI metrics – 75% for adjusted EBITDA margin growth and 25% for revenue growth – reinforce the long-term objective of profitable growth in our value-add businesses.

To drive management behavior that maximizes financial performance and value, Alcoa holds managers accountable for factors they can directly control. Because the Company’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 to establish the annual business plan for an upcoming year, we established assumptions for the London Metal Exchange (LME) price of aluminum (and related regional premium prices) as well as foreign currency exchange rates (FX), both of which can have significant effects on financial results and neither of which management performance can impact.

LME: Without normalization, in years when the LME price of aluminum rises rapidly relative to assumptions in the business plan, such as in 2014, IC and LTI would be less effective as a performance incentive because management would receive an unearned benefit. Conversely, when the LME price of aluminum falls dramatically, as it did in 2015, failure to normalize would demotivate employees by putting any IC and LTI awards out of reach for reasons beyond their control. Instead, Alcoa Inc.’s use of normalization enabled Alcoa Inc. 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. Effective November 1, 2016, Arconic eliminated normalization for LME aluminum price changes under incentive plan results due to the spinoff of the upstream business.

FX: Since Alcoa Inc.’s revenues were largely U.S. dollar-denominated, while costs in non-U.S. locations were largely denominated in local currency, the volatility of FX also has had a significant impact on Alcoa Inc.’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 LME aluminum price swings needs to be corrected by concurrent normalization of FX.

Because Alcoa Inc. generally did not hedge FX or LME fluctuations, normalization is a practice that Alcoa Inc. followed for many years to ensure that management remained highly focused on achieving and surpassing operational and strategic goals that benefit our top- and bottom-line performance.

 

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As the chart below shows, normalization was necessary and appropriate in 2016 for Alcoa Inc. Since LME and regional premiums had the greatest impact on the commodity segment of the portfolio, which transferred to Alcoa Corporation in the separation, the Compensation Committee decided that LME normalization would not apply to Arconic’s results for the final two months of 2016.

Uncontrollable market forces had significant impact on Alcoa Inc.’s 2016 financial results.

 

Market Force		Benchmark				2016 Sensitivity for Net Income ($M)
LME			+/-$100/MT				+/-$190
FX			USD +/-10%				+/-$225

The Company set 2016 financial targets that drive long-term shareholder value. As described in this CD&A, Alcoa Inc. had a rigorous process to develop the financial targets on which it based its IC and LTI targets. Given the impact of a variety of external factors affecting Alcoa Inc.’s financial performance, the target-setting process took into account the complexities of the business and the multiple external factors that impact it. As the Company successfully addressed the challenging situation facing the aluminum industry during the past eight years, its incentive targets played a major role in driving Alcoa Inc.’s year-over-year improvements in underlying operational fundamentals and financial performance. The 2016 IC and LTI financial targets were established to continue that progress. Following the review of the Company’s 2016 business plan by Alcoa Inc.’s Board of Directors in February 2016, the Compensation Committee approved the metrics and targets after assessing the relevance of the metrics to Alcoa Inc.’s strategy and value creation and the difficulty and appropriateness of the targets to drive performance.

The Company’s IC and LTI structure is an important motivator for achieving and exceeding targets. To attract, motivate, align and retain high performing executives, Alcoa designs its compensation programs at median base salary levels while providing cash and equity incentives that motivate exceptional performance. Given the demanding leadership challenges confronting the aluminum industry in recent years, the prospect of an upside in IC and LTI has proven to be a major retention factor and has had a demonstrable impact on motivating managers to overcome those obstacles and achieve strong operational and financial performance. Those incentives also helped to retain top talent during a period of uncertainty and heightened threat of poaching by competitors. We maximize the impact of IC and LTI incentives by setting a steep slope to threshold and flatter slope to maximum payout. This dis-incentivizes below-target performance by eliminating payouts for missing targets by more than a small margin and motivates significant upside performance.

2016 Payouts for IC and LTI Awards Reflected 2016 Performance Against Aggressive Targets, While Designed to Reward and Retain Talent

As described in “—2016 Annual Cash Incentive Compensation” and “—2016 Equity Awards: Stock Options and Performance-Based Restricted Share Units,” the Compensation Committee established a framework for applying IC and LTI both prior to and after the separation based on the corporate and business assignment of executives. Following is a report of the IC and LTI results for Alcoa Inc. and Arconic.

The 2016 Annual Cash Incentive Compensation payout was 99% of target. The corporate annual cash IC plan for 2016 was designed to achieve operating goals set at the beginning of the year for Alcoa Inc. and Arconic. Because the separation occurred on November 1, 2016, the final IC plan results for Corporate employees reflected results against 10-month targets for Alcoa Inc. prorated for 10 months plus results against full-year targets for Arconic prorated for 2 months. The final 2016 IC result was 100.7% (Alcoa Inc.) *10/12 + 90.2% (Arconic) *2/12 = 99.0%. This represents a 5% reduction of the IC payout formula due to a contractor fatality in our Brazilian Upstream business. (See IC chart in “—2016 Annual Cash Incentive Compensation”)

The 2016 Performance-Based Restricted Share Unit Payout was 87.2% of target.   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 performance over a multi-year period and support the retention of our management team. In January 2016, stock awards in the form of stock options (X% of target grant date value) and performance-based restricted share units (X% of target grant date value) were made to each of the NEOs. The final 2016 result for the performance RSUs

 

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was 89.4% (Alcoa Inc.) *10/12 + 76.3% (Arconic) *2/12 = 87.2%. (See LTI charts in “—2016 Equity Awards: Stock Options and Performance-Based Restricted Share Units”)

Below-target IC/LTI was due to aerospace industry transition and soft commercial transportation market.  The IC miss against plan was primarily caused by a profitability shortfall in the EPS Group, which derives roughly 75% of its revenues from aerospace customers. As the aerospace industry shifted to production of next-generation commercial aircraft, our customers undertook a destocking of their inventories of parts for current models. Meanwhile, Arconic incurred additional costs as it ramped up to respond to an anticipated increase in demand within its aircraft engines business. With more than $13 billion in multi-year aerospace contracts signed in the past two years, the 2016 issues are not expected to have a long-term impact on EPS. The profitability shortfall in EPS was partially offset by strong cash performance within GRP as well as the inclusion of the 10-month performance of Alcoa Inc.’s Upstream business (now Alcoa Corporation). The biggest driver of below-target LTI was the continued decline in the North American commercial transportation market, which resulted in a significant revenue shortfall against plan.

For 2017 and Beyond, the Compensation Committee Made Changes to Arconic’s Executive Compensation Plans that Reinforce a Commitment to Best-in-Class Compensation and Governance Practices

Beginning after the announcement of the planned separation of Alcoa Inc. in September 2015, the Chairman and CEO, the Lead Director and the Compensation Committee Chairman had more than 80 meetings with portfolio managers, investor governance officials and proxy advisory firms to discuss separation plans and obtain investor insights and recommendations for Arconic’s 2017 executive compensation and governance practices.

The Company also did an exhaustive benchmarking study of companies with a strong track record in executive compensation practices and analyzed the proxies of the 17 companies in Arconic’s new CEO peer group (see “—Comparator Peer Groups”). The study addressed compensation design and mix, short-term and long-term performance metrics, long-term incentive mix by award type, performance periods, vesting provisions, short-term and long-term incentive payout history, stock ownership guidelines and change-in-control provisions. In a few areas, the study found practices that were unsuitable for Alcoa, Inc. due to limitations caused by the volatility of its commodity market. In several instances, the study identified practices that were ideally suited to the unique needs and opportunities of Arconic.

Based on the investor insights and the peer benchmarking study, as well as counsel from the Compensation Committee’s independent consultant, Pay Governance, the Committee made the following important decisions in relation to the design of Arconic’s executive compensation plans and practices:

Compensation Pay Mix: The Committee endorsed the Company’s strong adherence to the compensation principles of pay-for-performance and the emphasis on equity as a major component of the compensation package to ensure shareholder alignment. Arconic’s CEO receives 80% of his equity award in the form of performance-based restricted share units, which was the highest percentage of the 17 companies in the new CEO peer group (see “—Comparator Peer Groups” for the list of the new peers).

Demonstrating the Company’s alignment between pay and performance, given the financial performance of the Company in 2016 and the significant positive impact on shareholder value, the realizable value of the January 2016 equity grants for the CEO has increased by 8% as of December 31, 2016:

 

Equity Component		Value at Grant as Shown in Summary Compensation Table					Realizable Value as of 12/31/2016					Realizable Value as % of Summary Compensation Table
Performance Restricted Share Units			$	7,912,221				$	9,247,474	*				117	%
Stock Options			$	1,978,002				$	1,387,225	**				70	%
Total			$	9,890,223				$	10,634,699					108	%

*	Units granted 1/19/16, including the earned amount in respect of the first one-year performance period, as described in “—2016 Equity Awards: Stock Options and Performance-Based Restricted Share Units.”

**	“In the money” value of stock options granted during 2016 based on the year-end stock price of $18.54 per share. Although these options are not exercisable on 12/31/16, they have a 10-year term, and their final realizable value will depend on the stock price at the time of exercise.

 

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Annual Incentive Plan Structure: The Compensation Committee decided to move from 80% financial and 20% non-financial IC goals to 90% financial and 10% non-financial IC goals for Arconic’s 2017 executive compensation plan. The financial metrics will be split between absolute Earnings Before Interest and Tax (EBIT) (45%) and Free Cash Flow (45%), incentivizing management to deliver profitable growth and efficient allocation of capital. Maintaining determination of 10% of the IC based on safety and diversity ensures that Arconic’s leaders continue to be incentivized to live by the Company’s values and adhere to high standards of social responsibility. Because the heavy environmental impact of Alcoa Inc.’s commodity business is not a factor for Arconic, the Company eliminated the environmental metric.

Long-Term Equity Plan Structure: Beginning with the January 2017 performance-based restricted share unit grants, and annually thereafter, performance-based restricted share unit awards will be earned based on performance against 3-year average targets set at the beginning of the performance period, rather than three 1-year targets.

Discontinued Normalization for LME: Effective November 1, 2016, Arconic eliminated normalization for LME aluminum price changes under incentive plan results due to the spinoff of the upstream business.

Return on Net Assets: To highlight Arconic’s increased priority on capital efficiency, 50% of the 2017 performance-based restricted share unit awards will be based on return on net assets (RONA). The remainder of the award will be based on 25% for revenue growth and 25% for adjusted EBITDA margin.

Relative Total Shareholder Return (TSR): To reinforce the importance of shareholder alignment and to comply with the increased emphasis on relative metrics, the 2017 performance restricted share unit awards will be subject to up to a 10% TSR multiplier. Failure to achieve a three-year TSR equivalent to that of Arconic’s peers will result in a payout decline of up to 10%; a three-year TSR that is higher than that of Arconic’s peers will result in up to a 10% increased payout.

Challenging Payout Curves: The Committee has continued the practice of setting payout curves with a steep drop-off below target to incentivize hitting target and flatter curve above target so that higher payouts can only be earned with significant performance above target. In the 2017 annual incentive plan, the curves are even more challenging. To earn 50% of the payout for the EBIT metric requires performance at 91% of target, while the 150% payout level requires performance at 118% of target. Similarly, under the 2017 long-term incentive plan, which is based on 3-year average performance, to earn 50% of the payout for the RONA metric requires performance at 80% of target, while the 150% payout level requires performance at 130% of target.

Change in Control (CIC) Severance Plan: With the support of management, the Compensation Committee on January 13, 2017 approved amendments to the existing CIC Severance Plan to adhere to best practices. Effective February 27, 2017 the following plan changes took effect:

 

•

Eliminated grandfathered modified single trigger, for which Mr. Kleinfeld was the only remaining eligible participant.

 

•

Eliminated grandfathered excise tax reimbursement benefit, for which Mr. Kleinfeld was the only remaining eligible participant.

 

•

Raised the threshold triggering a CIC from 20% to 30% of shares or total voting power that are acquired.

 

•

Reduced severance benefit levels of all participants except the CEO, whose benefit levels are in line with market practice.

Those changes to executive compensation design and the CIC Severance Plan were made as part of Arconic’s goal to maintain best-in-class practices for executive compensation and corporate governance. They are also designed to meet the unique needs of Arconic’s executive compensation to support our goals for attracting, motivating and retaining key executives; aligning executives’ interests with those of Arconic’s shareholders; and generating superior operating results that impact Arconic’s TSR.

 

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COMPENSATION DESIGN AND ANALYSIS

Analysis of 2016 Compensation Decisions

 

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

 

•

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

 

•

Individual, Group, and Corporate performance;

 

•

Complexity and importance of the role and responsibilities;

 

•

Aggressiveness of targets;

 

•

Signing of contracts that will positively impact future performance;

 

•

Unanticipated events impacting target achievement;

 

•

Retention of key individuals in a competitive talent market; and

 

•

Leadership and growth potential.

Based on these factors, an individual multiplier is applied to each NEO IC award and equity grant to reflect the Committee’s assessment of that individual’s 2016 performance.

Comparator Peer Groups

To help determine total direct compensation for the CEO in 2016, we used a peer group consisting of 10 Materials and 10 Industrials companies that are relevant to and aligned with Alcoa Inc.’s upstream (materials) and mid/downstream (industrials) businesses. This was the same peer group used to help determine CEO pay in 2015. Pay Governance, the Compensation Committee’s independent compensation consultant, has reviewed and endorsed this peer group. The companies in the CEO peer group are:

 

Materials Companies		Industrials Companies
•  Dow Chemical		•  3M
•  DuPont		•  Cummins
•  Freeport McMoran		•  Danaher
•  Huntsman		•  Deere
•  International Paper		•  Eaton
•  LyondellBasell Industries		•  Emerson Electric
•  PPG Industries		•  General Dynamics
•  Newmont Mining		•  L-3 Communications
•  Nucor		•  Northrop Grumman
•  United States Steel		•  Raytheon
		2016 Median Revenue: $18,628 million

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 for 2016 decisions. This peer group reflects the broad-based group of companies with which we compete for non-CEO executive talent. The Compensation Committee’s independent compensation consultant has reviewed and endorsed this peer group. For 2016, 137 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-1—Alcoa Inc. Peer Group Companies for Market Information for 2016 Executive Compensation Decisions.”

 

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In 2016, the Compensation Committee approved a new CEO peer group that reflects the mix of Arconic’s businesses. This peer group was used to make 2017 compensation decisions. The companies in the new CEO peer group are:

 

Arconic’s New CEO Peer Group (for 2017 Pay Decisions)
•  BorgWarner Inc.		•  Northrop Grumman Corporation
•  Cummins Inc.		•  PACCAR Inc
•  Danaher Corporation		•  Parker-Hannifin Corporation
•  Delphi Automotive PLC		•  Raytheon Company
•  Eaton Corporation plc		•  Rockwell Collins, Inc
•  Honeywell International Inc.		•  Spirit AeroSystems Holdings, Inc.
•  Illinois Tool Works Inc.		•  Stanley Black & Decker, Inc.
•  Ingersoll-Rand plc		•  Textron Inc.
•  L-3 Communications Holdings, Inc.
		2016 Median Revenue: $13,788 million

In 2016, the Compensation Committee also approved a new peer definition for other executive level positions within the Towers Watson survey to better reflect the mix of Arconic’s businesses after the separation. This peer group was used to make compensation decisions related to Arconic following the separation and consists of companies heavily weighted towards industrials with revenues between $7 billion and $30 billion. See “Attachment B-2—Arconic Inc. Peer Group Companies for Market Information for 2016 Executive Compensation Decisions Following the Separation.”

The data from each of these peer groups described above is considered in establishing executive compensation targets and to ensure that Arconic 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 2016, the Compensation Committee awarded Mr. Kleinfeld performance share awards and stock options with a total grant-date value of $9,890,223, based on his individual performance in 2015. Eighty percent of the award ($7,912,221) was granted as performance share awards, and 20% of the award ($1,978,002) was granted as stock options. In making this decision, the Compensation Committee considered the operational performance of the Company as Alcoa Inc. in 2015, the performance of the Company’s stock during 2015, the importance of aligning Mr. Kleinfeld’s compensation with shareholders as he led preparations for the separation of Alcoa and the median level of equity as reported for the then CEO peer group based on 10 Industrials and 10 Materials companies aligned with Alcoa Inc.’s upstream (materials) and mid/downstream (industrials) businesses. The grant-date value of the January 2016 award represents an 8.0% decrease over the prior year’s award for 2014 performance, given the extremely challenging environment for commodities in 2015 which had an adverse impact on stock price. Mr. Kleinfeld’s annual IC award for 2016 of $2,137,320 was slightly below plan target reflecting 10 months of Alcoa Inc. performance (100.7% of plan target) prior to separation and 2 months of Arconic Inc. performance (90.2% of plan target) following separation. The award was based on the corporate IC plan weighted result of 99.0%, as described above, and a corresponding 100% individual multiplier.

Former Executive Vice President and Chief Financial Officer—Mr. Oplinger. Mr. Oplinger served as the Chief Financial Officer of Alcoa Inc. from January 1, 2016 up until the separation, after which he continued as Chief Financial Officer of Alcoa Corporation. In January 2016, Mr. Oplinger was granted performance share awards valued at $1,280,061 and stock options valued at $320,014, which was in line with the total target award value and which, along with other unvested equity awards in Alcoa Inc., have since been converted into unvested equity awards in Alcoa Corporation in accordance with the terms of the Employee Matters Agreement entered into between Arconic and Alcoa Corporation in connection with the separation. As Mr. Oplinger became the Chief Financial Officer of Alcoa Corporation and ceased to be an employee of Alcoa Inc. (and Arconic Inc. as the legacy entity) upon separation, his final IC award for 2016 became subject to approval by the Board of Directors of Alcoa Corporation, a legally separate entity. Consequently, Mr. Oplinger did not receive an annual cash incentive award payment from the Company and the amount disclosed for his 2016 Non-Equity Incentive Plan

 

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Compensation is $0 for the purposes of the Company’s 2016 Summary Compensation Table. However, his annualized target for the year as a named executive officer of Alcoa Inc. is included in the 2016 Grants of Plan-Based Awards Table.

Executive Vice President and Chief Financial Officer—Mr. Giacobbe. Mr. Giacobbe was appointed Chief Financial Officer of Arconic effective upon the separation. In January 2016, Mr. Giacobbe was granted performance share awards valued at $195,190 and restricted share units valued at $195,190, which was above the target award due to his strong performance in 2015 in his prior role of Group Chief Financial Officer of Engineered Products and Solutions. Mr. Giacobbe’s annual IC award for 2016 of $281,824 was above target at 107% due to the IC plan result and his performance review for 2016. The award was based on 10 months of Alcoa Inc. performance (100.7% of plan target) prior to separation and 2 months of Arconic Inc. performance (90.2% of plan target) following separation. The award was based on the corporate IC plan weighted result of 99.0%, as described above, and a corresponding 110% individual multiplier. Mr. Giacobbe received a 17% salary increase effective June 1, 2016, based on his performance in transition as the designated Chief Financial Officer of Arconic and a subsequent 15% increase effective upon separation to bring his salary closer to the median of the peer group in his new role.

Executive Vice President and Group President, Engineered Products and Solutions—Mr. Tragl. Mr. Tragl commenced employment with Alcoa Inc. in February 2016 as Executive Vice President and Group President, Transportation and Construction Solutions. Mr. Tragl did not receive an annual long-term incentive award in January 2016 but was granted a one-time special performance share award valued at $1,600,176 in July 2016 following his appointment as Executive Vice President and Group President, Engineered Products and Solutions. These awards were earned based on EPS performance in 2016 against the metrics and targets below and will vest three years from the date of grant:

2016 Special Performance-Based Equity Grant Targets and Results for Karl Tragl

 

Performance Measure		Payout Percentage																									2016 Result					Plan Result					Weighting					% of Target Award Earned in 2016
		0%					50%					100% (Target)					150%					200%
Revenue $M  (Excluding Remmele)				$5,780					$5,830					$5,900-$6,100					$6,240					$6,380					$5,705					0.0%					25%					0.0%
Adjusted EBITDA $M				$1,058					$1,200					$1,239-$1,342					$1,469					$1,630					$1,195					47.7%					75%					35.8%
TOTAL																																							100%					35.8%

The earned value of the special performance-based equity award was $444,700 as of December 30, 2016, based on Arconic’s closing stock price of $18.54 on that date (see the “2016 Grants of Plan-Based Awards” table). Mr. Tragl’s annual IC award for 2016 of $557,756 was above target at 128.7% due to his performance review for 2016. The award was determined based on the following: (1) 50% on the corporate IC plan and 50% on the IC plan results for the TCS business group, prorated for the period from January 1, 2016 through May 2016 during which he led the TCS business group, (2) 50% on the corporate IC plan and 50% on the IC plan results for the EPS business group, prorated for the remainder of 2016, and (3) an individual multiplier of 150%. The TCS and EPS groups’ IC plans for 2016 had the same design as the corporate plan and similar financial metrics. The TCS group’s IC plan result for 2016 was 92.3%. The EPS group’s IC plan result for 2016 was 68.3% in light of missed targets based on aggressive forecasts incorporating the Firth Rixson acquisition and decelerating demand in the aerospace sector (see the discussion on EPS performance in “—The Company Delivered Solid Operational and Financial Performance in 2016”). Mr. Tragl received a 5% salary increase effective May 16, 2016 upon his appointment as Executive Vice President and Group President, Engineered Products and Solutions and to bring his salary closer to the median of the peer group.

Executive Vice President, Corporate Development, Strategy & New Ventures—Mr. Kollatz. In January 2016, Mr. Kollatz was granted performance share awards valued at $344,010 and restricted share units valued at $344,010, which was above the target award due to his strong performance review in 2015. Mr. Kollatz’ annual IC award for 2016 of $551,877 was above target at 148.4% based on the corporate IC plan weighted result of 99.0%, as described above, and a corresponding 150% individual multiplier. Mr. Kollatz received a 5.0% salary increase effective March 1, 2016. Mr. Kollatz’s compensation awards were based on his strong performance in 2015 and 2016 when he assumed the additional responsibility to lead the Separation Program Office and drive the complex separation process to a successful conclusion on schedule and on budget

 

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(as described in “—The Separation Strategy, Design and Management Delivered Significant Value for Shareholders”) in addition to his other duties.

Executive Vice President and Group President, Global Rolled Products—Mr. Meggers. In January 2016, Mr. Meggers was granted performance share awards valued at $1,280,061 and stock options valued at $320,014, which was in line with the total target award value. Mr. Meggers’s annual IC award for 2016 of $556,528 was above target at 117.7% based on the corporate IC plan weighted result of 99.0%, as described above, and 50% on the IC plan results for the GRP business group, which he leads, and an individual multiplier of 110%. The GRP group’s IC plan for 2016 had the same design as the corporate plan and similar financial metrics. The GRP group’s IC plan result for 2016 was 115.2% based on the group’s contribution to the overall corporate results (see the discussion on GRP performance in “—The Company Delivered Solid Operational and Financial Performance in 2016”). Mr. Meggers received an 11.1% salary increase effective March 1, 2016 based on his strong performance in 2015 and to bring his salary closer to the median of the peer group. This was his first salary increase since 2011.

Former Executive Vice President and Group President, Engineered Products and Solutions—Mr. Jarrault. Mr. Jarrault served as the Company’s Executive Vice President and Group President, EPS from January 1, 2016 and resigned in May 2016. In January 2016, Mr. Jarrault was granted performance share awards valued at $1,600,076 and stock options valued at $400,002, which was above the target award, based on his performance review in 2015. Based on Mr. Jarrault’s retirement eligibility at the time of his departure, his 2016 award grant will continue to vest in accordance with the terms and conditions governing those awards. Mr. Jarrault’s annual IC award for 2016 of $298,215 was below target at 84.5%. The award was based 50% on the corporate IC plan result of 100.7% reflecting Alcoa Inc. performance prior to separation, as described above, and 50% on the IC plan result of 68.3% for the EPS business group, which he led until May 2016, and an individual multiplier of 100%.

Former Executive Vice President, Chief Legal Officer and Secretary—Ms. Strauss. Ms. Strauss served as the Company’s Executive Vice President, Chief Legal Officer and Secretary from January 1, 2016 until her retirement upon completion of the separation. In January 2016, Ms. Strauss was granted performance share awards valued at $1,408,121 and stock options valued at $352,005, which was above the target award due to her strong performance review in 2015 and virtually the same total grant-date value as the prior year. Ms. Strauss’ annual IC award for 2016 of $838,601 was above target at 148.4% based on the corporate IC plan weighted result of 99.0%, as described above, and a corresponding 150% individual multiplier. Ms. Strauss was also granted a cash bonus of $200,000 for 2016 performance. Her individual multiplier and additional cash bonus recognize her outstanding contributions to the successful completion of a complex separation that required a wide range of legal negotiations, including transferring 1,592 vendor contracts, establishing 25 new legal entities, and handling 113 legal name changes. She also oversaw the many required filings with the U.S. Securities and Exchange Commission and Internal Revenue Service as well as a multitude of other government approvals with agencies in the U.S. and the other countries where we do business.

2016 Annual Cash Incentive Compensation

 

The corporate annual cash IC plan for 2016 was designed to achieve operating goals set at the beginning of the year for both Alcoa Inc. and Arconic.

After establishing the targets for the financial measures, the payout ranges were set above and below the target as shown in the tables 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 IC paid.

Because the separation occurred on November 1, 2016, the final IC plan results for Corporate employees were calculated based on results against 10-month targets for Alcoa Inc. prorated for 10 months plus results against full-year target for Arconic prorated for 2 months. The final 2016 IC result was 100.7% (Alcoa Inc.) *10/12 + 90.2% (Arconic) *2/12 = 99.0%.

 

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2016 Annual Cash Incentive Compensation Plan Design, Targets and Results – Alcoa Inc.

 

				Defined Corporate Level Payout
Metric				Percentage
				0%				50%				100% (Target)				150%				200%				Result				IC Result				Weighting				Formula Award
($ in millions)
Financial Measures1		Adjusted FCF
				-$	1,169			-$	939			-$	710			-$	252			$	207			-$	533				119	%			40	%			47.7	%
		Adjusted EBITDA
				$	2,023			$	2,205			$	2,386			$	2,790			$	3,194			$	2,360				93	%			40	%			37.1	%
																																					84.8	%
Non- Financial Measures		Safety2
		DART							0.499				0.48								0.458				0.36				200	%			5.0	%			10.0	%
		Environment3
		CO2 Emissions Reduction (metric tons)							131,000				195,000								285,000				101,000				0	%			5.0	%			0.0	%
		Diversity4
		Executive Level Women, Global							22.7	%			22.8	%							23.3	%			23.2	%			167	%			2.5	%			4.2	%
		Executive Level Minorities, U.S.							15.9	%			16.0	%							16.5	%			16.2	%			126	%			2.5	%			3.1	%
		Professional Level Women, Global							27.9	%			28.0	%							28.5	%			28.3	%			142	%			2.5	%			3.6	%
		Professional Level Minorities, U.S.							18.9	%			19.0	%							19.5	%			18.6	%			0	%			2.5	%			0.0	%
																																					10.9	%
IC RESULT (CALCULATED)																																	100	%			105.7	%
5% REDUCTION DUE TO FATALITY																																					-5.0	%
FINAL ALCOA INC. IC RESULT																																					100.7	%

2016 Annual Cash Incentive Compensation Plan Design, Targets and Results – Arconic Inc.
				Defined Corporate Level Payout
Metric				Percentage
				0%				50%				100% (Target)				150%				200%				Result				IC Result				Weighting				Formula Award
($ in millions)
Financial Measures1		Adjusted FCF
				-$	7			$	140			$	286			$	579			$	872			$	549				145.0	%			40	%			58.0	%
		Adjusted EBITDA
					1,766			$	1,894			$	2,023			$	2,328			$	2,634			$	1,854				34.5	%			40	%			13.8	%
																																					71.8	%
Non- Financial Measures		Safety2
		DART							0.534				0.512								0.484				0.426				200	%			5.0	%			10.0	%
		Environment3
		CO2 Emissions Reduction (metric tons)							31,600				63,100								126,300				58,600				93	%			5.0	%			4.6	%
		Diversity4
		Executive Level Women, Global							23.7	%			23.8	%							24.2	%			24.2	%			200	%			2.5	%			5.0	%
		Executive Level Minorities, U.S.							15.5	%			15.6	%							16.0	%			15.3	%			0	%			2.5	%			0.0	%
		Professional Level Women, Global							29.5	%			29.6	%							30.0	%			29.6	%			100	%			2.5	%			2.5	%
		Professional Level Minorities, U.S.							19.7	%			19.8	%							20.2	%			19.7	%			50	%			2.5	%			1.3	%
																																					8.8	%
IC RESULT (CALCULATED)																																	100	%			95.2	%
5% REDUCTION DUE TO FATALITY																																					-5.0	%
FINAL ARCONIC INC. IC RESULT																																					90.2	%

 

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FX (for Alcoa Inc. and Arconic results) and the price of aluminum on the LME (Alcoa Inc. results only) 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 FCF and Adjusted EBITDA. 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	For more information on the target setting for the financial metrics, see discussion in “—The Company Chose 2016 Metrics that Drive Long-Term Economic Value, and IC and LTI Targets that Drove Solid Performance.”

2

Safety targets were based on reductions 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.

3	The environmental target highlights our commitment to reduce CO2 emissions in 2016 and make progress against previously set 2030 environmental goals.

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.

2016 Equity Awards: Stock Options and Performance-Based Restricted Share Units

 

Long-term stock incentives are performance-based. We grant long-term stock awards to NEOs to align their interests with those of shareholders, link their compensation to stock price performance over a multi-year period and support their retention. In January 2016, stock awards were made to all of the NEOs.

In general, we provide two types of annual equity awards to the NEOs (except as otherwise noted in the section entitled “Performance-Based Pay Decisions” above):

 

•

20% of the grant date value of 2016 equity awards for each of our NEOs is granted in the form of stock options. We believe that stock options further align our NEOs’ 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) subject to continued employment (subject to certain exceptions) and have a ten-year term.

 

•

80% of the grant date value of 2016 equity awards for each of our NEOs was granted in the form of performance-based restricted share units.

 

•

Performance-based restricted share units support longer-term operational targets, which differ from the financial metrics in our IC plan. Since the grant occurred prior to the separation and the performance of Alcoa Inc. was still subject to the volatility of the aluminum market, performance for the 2016 awards is measured as the 3-year average achievement against annual targets. Awards vest and are paid at the end of three-year performance period subject to continued employment (with certain exceptions).

 

•

Beginning with the January 2017 performance-based restricted share unit grants, the awards will be earned based on performance against 3-year targets, rather than three 1-year targets. For further discussion, see “—For 2017 and Beyond, the Compensation Committee Made Changes to Arconic’s Executive Compensation Plans that Reinforce a Commitment to Best-in-Class Compensation and Governance Practices.”

 

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2016-2018 Performance-Based Restricted Share Unit Design and Results for 2016

As described above, the 2016 performance goals for performance-based restricted share units were based on a combination of goals applicable to Alcoa Inc. pre-separation and goals applicable to Arconic post-separation. The final 2016 result for the performance-based restricted share units was 89.4% (Alcoa Inc.) *10/12 + 76.3% (Arconic) *2/12 = 87.2%.

 

		Weight				0%				50%				100% (Target)				150%				200%				Actual Result				% of Target				Weighted Result
Arconic (10-month)
Revenue Growth (%)			25.0	%			8.0	%			9.3	%			10.6	%			13.2	%			15.9	%			1.7	%			0.0	%			0.0	%
Adjusted EBITDA Margin (%)			75.0	%			11.8	%			13.2	%			14.5	%			16.0	%			18.0	%			14.9	%			113.5	%			85.1	%
Arconic Measures			100.0	%																															85.1	%
GPP (10-month)
Aluminum EBITDA/MT ($)			50.0	%			34				71				108				183				257				108				100.1	%			50.1	%
Alumina EBITDA/MT ($)			50.0	%			31				35				39				45				50				38				87.0	%			43.5	%
GPP Measures			100.0	%																															93.6	%
Alcoa Inc. Corporate
Arconic			50.0	%																															42.5	%
GPP			50.0	%																															46.8	%
Alcoa Inc. Corp Measures			100.0	%																															89.4	%

 

		Weight				0%				50%				100%				150%				200%				Actual Result				% of Target				Weighted Result
Arconic (Full-year)
Revenue Growth (%)			25.0	%			8.0	%			9.3	%			10.6	%			13.2	%			15.9	%			0.9	%			0.0	%			0.0	%
Adjusted EBITDA Margin (%)			75.0	%			11.8	%			13.2	%			14.5	%			16.0	%			18.0	%			14.5	%			101.7	%			76.3	%
Arconic Final Payout			100.0	%																															76.3	%

Other Compensation Policies and Practices

 

We highlight below certain executive compensation practices, both 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 nonfinancial areas. As noted above, performance against rigorous adjusted FCF, 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 “—Analysis of 2016 Compensation Decisions,” for 2016 compensation decisions, we used a focused peer group consisting of 10 Materials and 10 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 used Towers Watson’s broad-based survey data for companies with revenues between $15 billion and $50 billion (excluding financial companies) for 2016 compensation decisions to help estimate competitive compensation for other executive level positions. We target our

 

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compensation structure at the median of each of these groups of companies. As discussed above, the peer group has been modified for 2017 to reflect the impact of the separation.

We Review Tally Sheets. The Compensation Committee reviews tally sheets that summarize various elements of historic and current compensation for each NEO 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 Arconic 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 NEOs retain equity equal in value to three times salary. Unlike many of our peers, we do not count any unvested or unexercised options, restricted share units, performance-based restricted share units or any stock appreciation rights towards compliance purposes. Our 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 (including performance-based restricted shares 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. As of Jan. 31, 2017, Messrs. Kleinfeld and Meggers have met the guidelines. The other continuing NEOs–Messrs. Giacobbe, Kollatz and Tragl–who were appointed to their current positions within the past two years, have not yet met the guidelines.

We Schedule and Price Stock Option Grants to Promote Transparency and Consistency. We grant stock options to named executive officers at a fixed time every year—generally the date of the Board and Compensation Committee meetings in January. 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 Claw Back Policies Incorporated into Our Incentive Plans. The 2009 and 2013 Arconic Stock Incentive Plans, the Incentive Compensation Plan for annual cash incentives and the Arconic 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.”

We Have Double-Trigger Equity Vesting in the Event of a Change in Control. Awards granted under our equity compensation plans 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 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 have 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;

 

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•

Discretion retained by the Compensation Committee to adjust awards;

 

•

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

 

•

Claw back policies applicable to all forms of incentive compensation;

 

•

Anti-hedging provisions in the Company’s 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; 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 in “The Board’s Role in Risk Oversight.”

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 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 2016, 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 34. Pay Governance LLC provided advice as requested by the Committee, on the amount and form of certain executive compensation components, 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 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.

We Actively Engage in Compensation and Governance-Related Discussions with Investors. We engage with investors throughout the year to obtain comments and insights that guide our executive compensation programs. Conversations with governance and compensation professionals at our investors help us understand investor priorities and provide us with guidance on our compensation and governance practices.

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-based restricted 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.

 

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We Do Not Allow Share Recycling. The 2009 and 2013 Arconic 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 Arconic Stock Incentive Plans prohibit repricing, including cash-outs of underwater stock options.

We Do Not Allow Hedging or Pledging of Company Stock. Short sales of Arconic securities (a sale of securities which are not then owned) and derivative or speculative transactions in Arconic 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 Arconic securities. Directors and officers subject to Section 16 of the Securities Exchange Act of 1934 are prohibited from holding Arconic securities in margin accounts, pledging Arconic 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 in Our Change in Control Severance Plan. As amended effective February 27, 2017, 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 within three years after a change in control of the Company. For a discussion of the Change in Control Severance Plan, see “Potential Payments upon Termination or Change in Control” on page 72.

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 NEOs, to perquisites that serve reasonable business purposes. (See “Notes to 2016 Summary Compensation Table—Column (i)—All Other Compensation.”) For the Chief Executive Officer only, the Company provides for personal use of Company aircraft and a Company car, and maintenance of security features of his personal residence. The transportation benefits provided to the Chief Executive Officer are for security and efficiency reasons and to enable him 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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2016 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			2016			$	1,440,000			$	—			$	7,912,221			$	1,978,002			$	2,137,320			$	3,111,941			$	226,304			$	16,805,788
			2015			$	1,440,000			$	—			$	8,600,394			$	2,150,025			$	1,816,020			$	3,246,848			$	232,942			$	17,486,229
			2014			$	1,440,000			$	—			$	6,960,058			$	1,740,011			$	3,228,984			$	4,568,900			$	220,569			$	18,158,522
Kenneth J. Giacobbe  Executive Vice  President and Chief  Financial Officer			2016			$	386,250			$	—			$	390,391			$	—			$	281,824			$	149,741			$	429,478			$	1,637,674
William F. Oplinger1  Former Executive Vice  President and Chief  Financial Officer			2016			$	458,333			$	—			$	1,280,061			$	320,014			$	—			$	351,494			$	23,650			$	2,433,552
			2015			$	541,667			$	—			$	1,600,406			$	400,020			$	479,375			$	327,386			$	37,500			$	3,386,354
			2014			$	500,000			$	—			$	1,288,037			$	322,028			$	849,375			$	413,526			$	30,000			$	3,402,966
Christoph Kollatz  Executive Vice  President, Corporate  Development, Strategy  & New Ventures			2016			$	531,250			$	—			$	688,019			$	—			$	551,877			$	—			$	104,068			$	1,875,214
Kay H. Meggers  Executive Vice  President and Group  President, Global  Rolled Products			2016			$	491,667			$	—			$	1,280,061			$	320,014			$	556,528			$	—			$	27,414			$	2,675,684
Karl Tragl2  Executive Vice  President and Group  President, Engineered  Products and Solutions			2016			$	453,125			$	—			$	1,600,176			$	—			$	557,756			$	—			$	125,243			$	2,811,300
Olivier M. Jarrault3  Former Executive Vice  President and Group  President, Engineered  Products and Solutions			2016			$	352,917			$	—			$	1,600,076			$	400,002			$	298,215			$	—			$	1,558,997			$	4,210,207
			2015			$	595,833			$	—			$	1,600,406			$	400,020			$	288,830			$	302,283			$	15,900			$	3,203,272
			2014			$	550,000			$	—			$	1,600,027			$	400,014			$	845,625			$	510,445			$	25,600			$	3,931,711
Audrey Strauss  Former Executive Vice  President, Chief Legal  Officer and Secretary			2016			$	565,000			$	200,000			$	1,408,121			$	352,005			$	838,601			$	—			$	67,351			$	3,631,078
			2015			$	565,000			$	—			$	1,408,208			$	352,013			$	550,027			$	—			$	76,189			$	2,951,437
			2014			$	565,000			$	—			$	1,408,042			$	352,018			$	844,619			$	—			$	78,277			$	3,247,956

Notes to 2016 Summary Compensation Table

¹Mr. Oplinger terminated employment with the Company and became Chief Financial Officer of Alcoa Corporation effective as of November 1, 2016, the date of the separation. This table reflects (a) base salary paid to Mr. Oplinger by the Company through November 1, 2016; (b) stock options and performance-based restricted share unit awards granted to Mr. Oplinger by the Company through November 1, 2016, which were assumed by Alcoa Corporation in connection with the separation, and the change in value of Mr. Oplinger’s pension, which was assumed by Alcoa Corporation in connection with the separation, through November 1, 2016. Mr. Oplinger did not receive an annual cash incentive award payment from the Company for 2016 due to his termination of employment with the Company in connection with the separation.

²The 2016 bonus amount for Mr. Tragl represents half of his negotiated sign-on bonus of $150,000. The bonus is payable in two equal installments, the first of which was paid upon the commencement of his employment in February 2016 and the second which will be paid upon his first anniversary of employment.

³Compensation for Mr. Jarrault reflects payments up until August 1, 2016, the termination date of his employment. His pension value declined by $328,033 but displays as $0 for purposes of the summary compensation table which does not allow negative adjustments to the total.

⁴The 2016 bonus amount for Ms. Strauss represents a one-time bonus of $200,000, associated with her continued service following the separation and her contributions towards successful completion of the transaction.

 

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Executive Compensation | Compensation Discussion and Analysis (continued)

 

 

 

Columns (e) Stock Awards and (f) Option Awards –

 

The amounts shown in the “Stock Awards” and “Option Awards” columns represent the grant date fair value of equity awards granted in 2016 determined in accordance with FASB ACS Topic 718 based on the assumptions and methodologies set forth in Note P to Arconic’s Annual Report on Form 10-K for fiscal year 2016. These values reflect the number of actual awards that were granted prior to the 1-for-3 reverse stock split in October 2016 and separation in November 2016 (as reflected in the “2016 Grants of Plan-Based Awards” table below). With respect to the performance-based restricted share units granted in 2016, the grant date fair value included in the “Stock Awards” column represents the target payout at the grant date based upon the probable outcome of the performance conditions. The minimum value at the grant date of these performance-based restricted share units assuming that threshold performance levels are not achieved is $0, and the maximum value at the grant date assuming that the highest level of performance is achieved is: Mr. Kleinfeld, $15,824,442, Mr. Giacobbe, $390,381, Mr. Oplinger, $2,560,122, Mr. Kollatz, $688,019, Mr. Meggers, $2,560,122, Mr. Tragl, $3,200,352, Mr. Jarrault, $3,200,152, and Ms. Strauss, $2,816,242.

Column (i) – All Other Compensation.

 

Company Contributions to Savings Plans.

 

Name		Company Matching Contribution								3% Retirement Contribution								Total Company Contribution
		Savings Plan				Def. Comp. Plan				Savings Plan				Def. Comp. Plan
Klaus Kleinfeld		$	15,900			$	70,500			$	7,950			$	0			$	94,350
Kenneth J. Giacobbe		$	13,808			$	0			$	0			$	0			$	13,808
William F. Oplinger		$	15,900			$	2,750			$	0			$	0			$	18,650
Christoph Kollatz		$	15,900			$	15,975			$	7,950			$	15,369			$	55,194
Kay H. Meggers		$	0			$	0			$	7,950			$	19,464			$	27,414
Karl Tragl		$	0			$	0			$	7,950			$	4,988			$	12,938
Olivier M. Jarrault		$	15,900			$	0			$	0			$	0			$	15,900
Audrey Strauss		$	15,900			$	18,000			$	7,950			$	25,501			$	67,351

Company Aircraft, Car Service and Security. In 2016, the incremental cost of Mr. Kleinfeld’s personal use of Company aircraft was valued at $75,315 and Mr. Kleinfeld had personal use of a Company car and driver valued at $51,540. The Company also covered maintenance of security features of the CEO’s personal residence at a cost of $5,099 in 2016.

Relocation Expenses. In 2016, Arconic provided benefits totaling $112,305, including a gross-up amount of $22,526, to Mr. Tragl related to his relocation to New York, NY, from Germany, where he started his employment in his prior role as Executive Vice President and Group President, Transportation and Construction Solutions. Mr. Kollatz received benefits totaling $48,874, including a gross-up amount of $7,725, pursuant to his relocation in 2015 to New York, NY from Germany. Arconic also provided $408,844 in relocation benefits to Mr. Giacobbe related to his move to New York, NY pursuant to his appointment of Executive Vice President and Chief Financial Officer of the Company and $6,826 in tax services related to an international assignment in a prior role when he was based in Switzerland.

Charitable Contributions. In 2016, the Alcoa Foundation matched $5,000 each in contributions made by Mr. Oplinger to an approved charitable organization and by Mr. Jarrault to an educational institution.

Severance Payments. Pursuant to his executive severance agreement, Mr. Jarrault was paid the following amounts on February 1, 2017, which was 6 months following his termination date:

 

•

Lump sum severance of $1,210,000, which is equivalent to two years of salary.

 

•

Lump sum payment estimated at $278,097, which is equivalent to the value of two years additional pension service.

 

•

Lump sum payment of $50,000 for the release of legal claims against the Company.

 

•

Continuation of health care benefits for two years.

 

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2016 GRANTS OF PLAN-BASED AWARDS

The following table reflects grants of plan-based awards as of the applicable grant date. Equity-based awards were subsequently adjusted to reflect the impact of the 1-for-3 reverse stock split of Alcoa Inc. common stock in October 2016 and in connection with the separation. See the table entitled “2016 Outstanding Equity Awards at Fiscal Year-End” for the number of equity-based awards outstanding as of December 31, 2016, after the adjustments to reflect the reverse stock split and the separation.

 

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 or Units3 (#)

All Other Option Awards: Number of Securities Underlying Options4 (#)

Exercise or Base Price of Option Awards ($/sh)

2016 Grant Date Fair Value of Stock and Option Awards ($)

Name

Grant Dates

Threshold ($)

Target