UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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Phillips 66

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March 28, 2018

To My Fellow Shareholders:

The Board of Directors and executive leadership team cordially invite you to attend the 2018 Annual Meeting of Shareholders to be held at The Westin Houston, Memorial City, 945 Gessner Road, Houston, Texas 77024, on Wednesday, May 9 at 9:00 a.m. Central Daylight Time. You will find information regarding the matters to be voted on at the meeting in the attached proxy statement.

Executing on strategy.   Phillips 66 is a diversified energy manufacturing and logistics company with a portfolio of midstream, chemicals, refining, and marketing and specialties businesses. Our diverse portfolio, resilient cash flow and disciplined capital allocation position us to capitalize on opportunities across the value chain. Our corporate strategy remains unchanged and clear—we aim to deliver profitable growth, enhance returns on capital, and grow shareholder distributions, while focusing on strong operating excellence and continuing as a high-performing organization.

In 2017, we increased our dividend payment by 11 percent and returned nearly $3 billion to shareholders through dividends and share repurchases. We generated higher earnings compared to the prior year by improving margins in our Refining business and placing Midstream growth projects into service. This progress was achieved through the efforts of our 14,600 employees and with record setting and industry leading safety and environmental performance.

Engaging with shareholders.   We value the perspectives our shareholders provide by participating at our annual meeting and engaging in conversations with us throughout the year. In 2017, we met with shareholders representing nearly half of our shares outstanding. We were provided valuable feedback that was shared with the full Board. As a result of these discussions, management is resubmitting a proposal asking shareholders to declassify the Board so that our directors will be elected annually. For additional information regarding the feedback we heard through our engagement efforts and actions taken in response, please refer to SHAREHOLDER AND COMMUNITY ENGAGEMENT of the attached proxy statement.

Your vote is very important.   Whether or not you plan to attend the annual meeting, and no matter how many shares you own, we encourage you to vote promptly. You may vote by telephone or over the Internet, or by completing, signing, dating and returning the enclosed proxy card or voting instruction form if you requested to receive printed proxy materials. The proposal to declassify the Board of Directors requires 80% of shares outstanding to vote in favor of the proposal. Therefore, it is very important that you vote your shares for this proposal. For additional information on voting your shares, please see the instructions in the proxy statement located under ABOUT THE ANNUAL MEETING.

I look forward to sharing more about your company when we gather for our annual meeting on May 9.

In safety, honor and commitment,

WOOD RIVER REFINERY CENTENNIAL

For 100 years, the Wood River Refinery has helped sustain the community of Roxana, Illinois, and its neighboring communities.

Founded in 1917 as the Roxana Petroleum Company, the plant on the banks of the Mississippi River helped give rise to the town itself. It also produced fuel for U.S. forces during World War II, winning accolades from the Army and Navy. Today, as a joint venture with Cenovus, the refinery has a more than $7 billion economic impact annually on the region, according to a study by Southern Illinois University at Edwardsville.

But it is giving back to the town that may best define the Wood River Refinery.

“Historically the refinery has helped shape Roxana with its economic impact,” said Refinery Manager Jerry Knoyle. “We want to be an engine for growth, but we also want to help build a better community.”

The Wood River Refinery contributes more than $500,000 to charitable causes each year through corporate philanthropy and employee contributions. Over the last 20 years, employees have given more than $5 million to the United Way alone. And last year, they used Phillips 66 Volunteer Grants to access more than $113,000 in funds for the organizations where they volunteer. The refinery’s most recent act of philanthropy: A playground for children of all abilities and a nod to the Phillips 66 values of safety, honor and commitment.

“When we give back, we want it to be with purpose and aligned with the values that we operate under every day,” Knoyle said.

Among the centennial festivities was—what else?—a community birthday party featuring food, fun and friends, as well as a tribute video that tells the stories of employees, past and present, that reached tens of thousands on social media. The refinery’s birthday celebration continues in 2018 with the 100-year anniversary of its first refined products. With almost 900 employees and more than 1,200 living retirees, you can bet the Wood River Refinery will be a force in the community for years to come.

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May 9, 2018 at 9:00 A.M. Central Daylight Time

The Westin Houston, Memorial City
945 Gessner Road
Houston, Texas 77024
(281) 501-4300

Items of Business

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To elect the three directors named in this proxy statement

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To ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for fiscal year 2018

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To consider and vote on a management proposal to approve, on an advisory (non-binding) basis, the compensation of our Named Executive Officers

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To consider and vote on a management proposal regarding the annual election of directors

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To transact other business properly coming before the meeting

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Record Date   You can vote if you were a shareholder of record on March 12, 2018. Shareholders as of the Record Date are invited to attend the annual meeting.

Annual Report   Our 2017 Annual Report to Shareholders accompanies, but is not part of, these proxy materials.

Vote Right Away   Your vote is very important to us and to our business. Even if you plan to attend our Annual Meeting in person, please vote right away using any of the following methods.

Please see ABOUT THE ANNUAL MEETING for information about voting.

This proxy statement and accompanying proxy are being provided to shareholders on or about March 28, 2018.

By Order of the Board of Directors

Paula A. Johnson
Corporate Secretary

March 28, 2018

2018 PROXY STATEMENT   1​

TABLE OF CONTENTS

2   2018 PROXY STATEMENT

This proxy summary highlights information contained elsewhere in this proxy statement. This summary does not contain all of the information that you should consider, and you should read the entire proxy statement carefully before voting. Throughout the proxy statement, we may refer to Phillips 66 as the “Company,” “we” or “our.” For more complete information regarding the Company’s 2017 performance, please review the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Your Company

Phillips 66 is a diversified energy manufacturing and logistics company. With a unique portfolio of assets in the midstream, chemicals, refining, and marketing and specialties businesses, the Company processes, transports, stores and markets fuels and products globally. Our industry is vitally important to the world-wide economy. Fossil fuels, particularly oil and natural gas, are the world’s primary energy source and are expected to remain so for decades to come. These sources are abundant and reliable, affordable and efficient. Phillips 66’s vision is to provide energy and improve lives through operating excellence, delivering energy safely, efficiently and sustainably. We improve lives by responsibly providing energy products that are essential for a high standard of living and health throughout the world.

We delivered strong operating and financial results in 2017. We continued our focus on operating excellence, with a record low safety rate. We also enhanced returns in our Refining business and executed on our Midstream and Chemicals businesses’ growth programs. Our balance sheet is strong, and we maintain a disciplined approach to capital allocation. In 2017, we increased our dividend by 11% and returned nearly $3 billion to shareholders through dividends and share repurchases.

The following highlights our performance during 2017 and for the three years ended December 31, 2017, as measured by our compensation program performance targets, which are discussed in the COMPENSATION DISCUSSION AND ANALYSIS.

2017 Performance

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Operating Excellence—Drives focus on safety, asset availability and environmental stewardship.   In 2017, we exceeded our targets in every metric of operating excellence. Our combined workforce recordable injury rate was 0.14, which averages to one injury per every 1.4 million hours worked, and we had the lowest number of reportable environmental events in Company history.

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High-Performing Organization—Measures effectiveness of our talent management initiatives.   We continued to build leadership capabilities and maximize the performance of our people in 2017. Approximately 25 percent of our employees were in locations impacted by Hurricane Harvey, yet almost all assets were operating by mid-September 2017.

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Adjusted Controllable Costs—Drives focus on cost management.   Our controllable costs were 2 percent below our 2017 target, which we were able to manage while absorbing company growth.

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Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization)—Aligns organization on value creation.   In 2017, we generated $5.74 billion of Adjusted EBITDA, an increase over 2016 results, but 13 percent below our target for the year.

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Three Years Ended 2017

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Total Shareholder Return (TSR)—Aligns executive compensation with long-term interests of shareholders. Our performance is evaluated compared to a group of peer companies and the S&P 100 Index.   For the three years ended December 31, 2017, our TSR was 55.1 percent, ranking 7th out of 16 peers (including the S&P 100 Index).

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Return on Capital Employed (ROCE)—Demonstrates the Company’s growth and overall performance. Our performance is evaluated on both an absolute and relative basis.   For the three-year performance period ending in 2017, our relative performance was 7th out of 15 peer companies and, on an absolute basis, was 10.1 percent.

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Your Board

Our business requires that we not only bring together a knowledgeable and qualified leadership team, but one with diverse backgrounds, experiences and perspectives. The composition of our Board and the experiences and backgrounds of our executives reflect the Company’s ongoing organizational commitment to diversity. The Nominating and Governance Committee seeks Board members who possess the highest personal and professional ethics, integrity and values, and are committed to representing the long-term interests of the Company’s shareholders. The Nominating Committee regularly reviews the

2018 PROXY STATEMENT   3​

PROXY SUMMARY

composition of the Board and the evolving needs of the Company’s businesses to ensure the Board reflects a range of talents, ages, skills, experiences, diversity, and expertise, sufficient to provide sound and prudent guidance with respect to the Company’s strategic and operational objectives. The charts below highlight the diversity and independence of our ten-member Board of Directors.

Proposals Requiring Your Vote

If you are a beneficial owner and do not give your broker instructions on how to vote your shares, the broker will not be able to vote on any proposal other than the ratification of Ernst & Young LLP as our independent registered public accounting firm for 2018. Your broker may not vote on any of the other proposals without instructions from you.

Our Shareholder Engagement

We value the views of our shareholders and other stakeholders. Throughout the past year, in addition to our ongoing community education and outreach, we proactively sought feedback from our shareholders. Over 90% of our offers to engage were accepted, representing nearly half of our shares outstanding, to discuss topics related to our business strategy and performance, Board composition and oversight, as well as governance and progress of our environmental and social initiatives.

As a direct result of these engagements, we have decided to again seek shareholder approval of a management proposal to eliminate our classified board structure and permit all directors to be elected annually. More information about the topics discussed and the actions we have taken can be found in SHAREHOLDER AND COMMUNITY ENGAGEMENT.

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PROXY SUMMARY​

Summary of Governance Best Practices

Our corporate governance practices are summarized below. Our Board regularly reviews evolving corporate governance best practices, changing regulatory requirements, and feedback from shareholders and makes changes it believes are in the best interest of the Company and its shareholders.

2018 PROXY STATEMENT   5​

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PROXY STATEMENT

This proxy statement and accompanying proxy are being provided to shareholders on or about March 28, 2018, in connection with the solicitation by the Board of Directors of Phillips 66 of proxies to be voted at the 2018 Annual Meeting of Shareholders on May 9, 2018.

Phillips 66 is committed to effective corporate governance and high ethical standards. We believe that corporate governance, including our values of safety, honor and commitment, is the foundation for financial integrity, investor confidence and sustainable performance. Our values guide how our 14,600 employees conduct business every day and how the Board of Directors oversees and counsels management in the long-term interest of the Company and our shareholders. We continuously strive to meet our vision of providing energy and improving lives, guided by our four pillars of sustainability:

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Operational Excellence

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Environmental Commitment

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Social Responsibility

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Economic Performance

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Our Board of Directors has adopted Corporate Governance Guidelines that establish a common set of expectations to assist the Board and its committees in performing their duties. The Guidelines are reviewed at least annually, and updates are made as necessary to reflect changing regulatory requirements, evolving best practices and input from shareholders and other stakeholders.

Our key corporate governance documents, including our Corporate Governance Guidelines, Charters of our Board’s committees, our By-Laws, and our Code of Business Ethics and Conduct can be found on the Company’s website in the “Investors” section, under the “Corporate Governance” caption. Any substantive amendment or waiver to the Code of Ethics and Business Conduct will also be posted to the website. We also publish a Sustainability Report, which presents our sustainability efforts and provides data, as well as programs and projects that demonstrate how we fulfill our vision of providing energy and improving lives. The Sustainability Report can be found on the Company website in the “Sustainability” section.

CODE OF BUSINESS ETHICS AND CONDUCT

Our values are our foundation—our guiding principles for how we conduct our business day in and day out. We also know that in today’s increasingly complex global business environment, questions can arise. We have adopted a Code of Business Ethics and Conduct designed to provide guidance on how to act legally and ethically while performing work for Phillips 66. Our Code of Business Ethics and Conduct covers topics including, but not limited to, conflicts of interest, insider trading, competition and fair dealing, discrimination and harassment, confidentiality, payments to government personnel, anti-boycott laws, U.S. embargoes and sanctions, compliance procedures and employee complaint procedures. All of our directors and employees, including our Chief Executive Officer (CEO), Chief Financial Officer (CFO), and other senior finance personnel, are subject to compliance with the Code of Business Ethics and Conduct.

SHAREHOLDER AND COMMUNITY ENGAGEMENT

At Phillips 66, we believe that we succeed together as a team, leveraging our diverse experiences and thoughts in an environment that thrives on collaboration. We embrace engagement as an important tenet of good governance and value the views of our shareholders and other stakeholders. We believe that positive dialogue builds informed relationships that promote

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transparency and accountability. Although the Lead Director or other members of the Board are available to participate in meetings with shareholders as appropriate, management has the principal responsibility for shareholder communication.

We also believe that engagement and good governance involve participating in political or public policy activities that advance the Company’s goals, are consistent with Company values, and improve the communities where we work and live. A number of federal, state and local laws govern corporate involvement in such activities, and we maintain policies, procedures and programs to comply with these laws. Additional information about our involvement in political or public policy activities is available on our website.

What We Do

For several years, Phillips 66 has conducted a formal shareholder outreach program to listen to investor perspectives on our business strategy, corporate governance, our executive compensation program, and other matters. Twice yearly, we formally solicit feedback from institutional investors including asset managers, public and labor union pension funds, and socially responsible investors. In 2017, we expanded our dialogue over the course of the year with shareholders representing nearly half of our shares outstanding, and with proxy advisory firms, to include sustainability matters.

Information and feedback received through our engagement activities is shared with our executive leadership team and the Board of Directors, which helps inform their decisions. For example, as a result of our engagement with shareholders in recent years, we enhanced our disclosures on political giving and activity and implemented a proxy access right for shareholders.

The feedback we received in 2017 has been supportive, and the conversations provided us an opportunity to further discuss Board composition and risk oversight, environmental and social business practices, and other governance and compensation matters.

Topics Discussed and Actions Taken

Board Declassification

Based on feedback from shareholders, management is resubmitting a proposed charter amendment that would eliminate our classified board structure and allow all directors to be elected annually. We encouraged shareholders at the annual meetings in both 2015 and 2016 to approve the same charter amendment but the amendment did not receive the required vote to pass in either year. We recognize that many of our shareholders would prefer a declassified board structure and are therefore resubmitting the proposal at this year’s Annual Meeting. We urge all shareholders to vote FOR the declassification proposal.

Board Composition

Many of our discussions with shareholders addressed the subject of Board composition and director skills and qualifications. Certain of our shareholders had a particular desire to understand how the Board considers refreshment and its composition in connection with current and future business needs. Additionally, investors inquired about the specific roles of the Board and its committees in the risk oversight process. In general, investors expressed minimal concerns about the current Board composition, individual directors, Board policies or our overall approach to shareholder engagement. We have enhanced our disclosures regarding several of these topics throughout this proxy statement based on the feedback we received.

Executive Compensation

During our discussions, investors continued to show support for our overall executive compensation program and viewed it as well-structured and aligned with our Company strategy and performance. Investors were particularly interested in discussing the disclosure around our incentive targets for our annual bonus program, as well as the long-term components of our program. This information is included in the COMPENSATION DISCUSSION AND ANALYSIS section later in this proxy statement.

Environmental, Social and Governance (ESG)

Investor interest in how companies view sustainability and how they integrate sustainability into their business objectives and corporate cultures has been increasing. During our engagements, investors inquired about Phillips 66’s practices, our views on different reporting methodologies, and the types of non-financial ESG issues that may impact our business or create reputational risks. We shared with investors the ESG factors that are included in our incentive compensation programs for measuring our

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performance, as disclosed in the COMPENSATION DISCUSSION AND ANALYSIS. We also described our enhanced disclosures of ESG issues that we made in 2017 through the updated publication of our Sustainability Report, which can be found on the Company website. With respect to the disclosure of ESG metrics generally, the Company continues to assess appropriate next steps, and will continue to engage with investors on this topic.

SUSTAINABILITY

Phillips 66 is dedicated to meeting the world’s energy needs responsibly, efficiently and sustainably. For us, sustainability means manufacturing and delivering affordable, clean products in a safe and environmentally sound manner. Our sustainability efforts are built on four pillars: operational excellence, environmental commitment, social responsibility and economic performance. Our Board of Directors oversees these efforts through its regular work and through its committees, each of which has been delegated responsibility for different areas of sustainability. For more information, see BOARD’S ROLE IN RISK OVERSIGHT.

We are focused on implementing best-in-class sustainability practices today and into the future. For example, we are conducting research to manage water consumption, improve energy efficiency and provide technology options for future power generation. We also are seeking solutions for tomorrow’s energy needs, from opportunities to blend biofuels into clean products to co-founding forward-looking think tanks, such as the Fuels Institute. Phillips 66 is one of the few energy companies with a state-of-the-art Research Center. We employ scientists and engineers in Bartlesville, Oklahoma, to conduct research to enhance the safety and reliability of our operations and to develop future air, water and energy solutions.

In the fourth quarter of 2017, we published an updated Sustainability Report. The report, which can be found on the Company website under the “Sustainability” section, seeks to provide a comprehensive resource for interested parties to learn about our sustainability policies and programs, with links to a suite of Company information, including policies, positions, educational information, and other reports.

Highlights of results we have delivered and the positive impact we have had on our communities include:

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Our combined total recordable injury rate (TRR) for employees and contractors was 0.14 in 2017, an industry leading achievement and record for the Company.

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Environmental reportable events continued to decline, with a year-over-year decrease of 15%.

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Of our U.S refineries, 45% have earned the U.S. EPA ENERGY STAR® award for top quartile energy efficiency performance.

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For strong safety records and safety and health management programs, 28 of our sites have received Voluntary Protection Program certification from the Occupational Safety & Health Administration.

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Our headquarters building in Houston, Texas, obtained Leadership in Energy & Environmental Design (LEED) Platinum certification.

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We have invested an aggregate of over $6 billion in safety, environmental and sustaining capital projects since 2012.

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Since 2012, our employees have donated over 230,000 hours of their time volunteering in local communities.

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To establish and maintain dialogue between the Company, local communities and stakeholders, 90% of our refining operations have community advisory councils or panels.

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Our pipeline business provides comprehensive community awareness, education and outreach programs to ensure that everyone living or working near lines or facilities is aware of their existence, adopts safe digging practices, learns the signs of a potential pipeline leak and knows how to quickly respond if a problem is suspected.

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We published a human rights position, to document our principle of recognizing the dignity, and valuing the worth, of all human beings, as reflected in our core values of safety, honor and commitment.

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OUR BOARD OF DIRECTORS

Our business and affairs are overseen by our Board of Directors in accordance with the general corporation law of the State of Delaware and our By-Laws. Members of the Board oversee the Company’s business by participating in Board and committee meetings, reviewing materials provided to them, and through discussions with the Chairman and CEO and with key members of management.

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How We Select our Director Nominees

The Board is responsible for nominating directors and filling vacancies that may occur between annual meetings, based upon the recommendation of the Nominating and Governance Committee. The Nominating Committee considers the Company’s current needs and long-term and strategic plans to determine the skills, experience and characteristics needed by our Board. The Nominating Committee identifies, considers and recommends director candidates to the Board of Directors with the goal of creating a balance of knowledge, experience and diversity. Generally, the Nominating Committee identifies candidates through the use of a search firm or the business and organizational contacts of directors and management.

When evaluating candidates, the Nominating Committee takes into consideration certain key qualifications and skills, as described below. Our Board also recognizes the value of diversity and considers how a candidate may contribute to the Board in a way that can enhance perspective and judgment through diversity in gender, age, ethnic background, geographic origin, and professional experience. The Nominating Committee also considers whether potential candidates will likely satisfy the independence standards for service on the Board and its committees.

For information on how shareholders may recommend candidates to the Nominating Committee or nominate their own candidates, see Shareholder Recommendation of Candidates and Nomination of Candidates below.

Skills and Qualifications We Seek in Directors

In evaluating potential candidates for nomination to the Board, as well as evaluating the Board’s overall composition, the Nominating Committee and the Board consider several factors. All directors are expected to possess the highest personal and professional ethics, integrity and values and be committed to representing the long-term interests of the Company’s shareholders. Directors also are expected to devote sufficient time and effort to his or her duties as a director.

The Nominating Committee believes that the Board should reflect a range of talents, ages, skills, experiences, diversity, and expertise sufficient to provide sound and prudent guidance with respect to the Company’s strategic and operational objectives. Although the Board does not have a separate policy on diversity, it desires to maintain a diverse membership and considers diversity when seeking nominees.

In addition to the fundamental skills and qualifications discussed above, the following are key skills and qualifications considered in evaluating director nominees and Board composition as a whole. The Board determined that a mix of these skills and qualifications provides the composition necessary to effectively oversee the Company’s execution of its strategy of delivering profitable growth, enhancing returns on capital and growing distributions to shareholders, underpinned by operational excellence and a high performing organization.

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CEO experience.   We seek directors with public company CEO experience. We believe individuals with CEO experience have valuable insights and a practical understanding of organizations, processes, strategy, risk and risk management and the methods to drive change and growth. Through service as top leaders at other organizations, directors with CEO experience bring valued perspectives on common issues affecting publicly traded companies such as Phillips 66.

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Financial reporting experience.   The Company measures its operating and strategic performance by reference to financial targets. In addition, accurate financial reporting and robust auditing are critical to the Company’s success. As a result, we believe it is important that directors have finance and financial reporting experience. We seek to have multiple directors who qualify as audit committee financial experts. We also expect all of our directors to be financially knowledgeable.

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Industry experience.   We believe that experience as an executive, director or other leadership position in the energy industry is an important qualification for service on the Board. Individuals with specific industry experience bring pertinent background and knowledge to the Board, providing valuable perspective on issues specific to the Company’s business.

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Global experience.   We are a global company. As such, we seek directors that have global business or international experience. This experience enables them to provide valuable perspectives on our operations and oversee strategic initiatives.

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Environmental experience.   We seek directors who have experience within the environmental regulatory field. We implement policies and conduct operations to ensure that our actions today will provide the energy needed to drive economic growth and social well-being, while also securing a stable and healthy environment for tomorrow. Individuals with an understanding of environmental regulations provide insight to help guide the Company in its mission of providing energy and improving lives.

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CORPORATE GOVERNANCE AT PHILLIPS 66

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Risk management experience.   Our Board has oversight responsibility for the Company’s risk management. As a result, we seek individuals with experience managing risk to ensure that directors are capable of fulfilling their risk oversight responsibilities, bringing background and experience to their duties that increase their effectiveness.

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The table below provides information on the directors’ qualifications, skills, characteristics and experience.

The lack of a “✔” for a particular item does not mean that the director does not possess that qualification, characteristic, skill or experience. We look to each director to be knowledgeable in these areas; however, the “✔” indicates that the item is a specific qualification, characteristic, skill or experience that the director brings to the Board.

Board Refreshment

The Board strives to maintain an appropriate balance of tenure, turnover, diversity, skills and experience.

The Board does not maintain term limits, but our Governance Guidelines include a mandatory retirement age of 75 for directors. As Phillips 66 is a relatively new company, the Board does not believe that term limits currently are necessary. Additionally, the Board believes that continuity of service can provide stability and valuable insight, based on experience and understanding of the Company. The average tenure of all of our directors is five years and the average age of all of our directors is 66 years.

The Board ensures refreshment and continued effectiveness through evaluation, nomination, and other policies, processes and practices. For example:

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The Nominating Committee annually reviews with the Board the qualifications for Board members and the composition of the Board as a whole.

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The Nominating Committee annually reviews each director’s continuation on the Board and makes recommendations to the full Board.

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The Company’s Corporate Governance Guidelines provide that directors whose principal outside responsibilities have changed from when they were elected to the Board should volunteer to resign to give the Board the opportunity to review the appropriateness of continued Board membership under the circumstances.

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Additionally, each committee of the Board performs an annual self-assessment, and the Nominating Committee and Lead Director oversee an annual self-assessment of the full Board. The self-assessment includes an evaluation survey and individual discussions between the Lead Director and each other director. A summary of the results of each committee’s self-assessment is presented to the committee and discussed in executive session. The Lead Director presents a summary of the results of the Board evaluation to the Board in executive session. Any matters requiring further action are identified and action plans developed to address the matter.

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To further ensure continued Board effectiveness, the Nominating Committee periodically considers Board committee rotations. For example, in 2016, after a review of the Company’s corporate governance policies and leadership structure to ensure they meet the Company’s needs, the Board rotated committee chairs and committee membership. The rotations were made based on the recommendation by the Nominating Committee that the changes would help provide fresh perspectives and enhance the directors’ familiarity with different aspects of the Company’s business while maintaining subject matter expertise on all committees.

Shareholder Recommendation of Candidates and Nomination of Candidates

The Nominating Committee will consider director candidates recommended by shareholders. A shareholder wishing to recommend a candidate for nomination by the Nominating Committee should follow the same procedures referred to below for nominations to be made directly by a shareholder. In addition, the shareholder should provide such other information deemed relevant to the Nominating Committee’s evaluation. Candidates recommended by the Company’s shareholders are evaluated on the same basis as candidates recommended by the Company’s directors, management, third-party search firms or other sources.

Our By-Laws permit proxy access for shareholders. Shareholders who wish to nominate directors for inclusion in our proxy statement or directly at an annual meeting in accordance with our By-Laws should follow the procedures described under SUBMISSION OF FUTURE SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS.

Majority Voting

To be elected, a director must receive a majority of the votes cast with respect to that director at the meeting. Our By-Laws provide that if the number of shares voted “for” a nominee who is serving as a director (an incumbent) does not exceed 50% of the votes cast with respect to that director, he or she will tender his or her resignation to the Board of Directors. The Nominating and Governance Committee will then make a recommendation to the Board on whether to accept or reject the resignation, or whether other action should be taken. Within 90 days of the certification of the shareholder vote, the Board is required to decide whether to accept the resignation and publicly disclose its decision-making process.

In a contested election, where the number of nominees exceeds the number of directors to be elected, the required vote would be a plurality of votes cast.

Director Independence

Our Corporate Governance Guidelines contain director independence standards, which are consistent with the standards set forth in the NYSE listing standards. These standards assist the Board of Directors in determining the independence of the Company’s directors. The Board of Directors has affirmatively determined that each director, except Mr. Garland, meets our independence standards. Mr. Garland is not considered independent because he is an executive officer of the Company.

In making independence determinations, the Board specifically considered the fact that many of our directors are directors or otherwise affiliated with companies with which we conduct business. Some of our directors are employees of, or consultants to, companies that do business with Phillips 66 and its affiliates (as further described in RELATED PARTY TRANSACTIONS). Additionally, some of our directors may purchase retail products (such as gasoline, fuel additives or lubricants) from the Company. In all cases, it was determined that the nature of the business conducted and the interest of the director by virtue of such position were immaterial both to the Company and to the director.

Executive Sessions of Independent Directors

The independent directors hold regularly scheduled executive sessions of the Board and its committees without Company management present. These executive sessions are chaired by the Lead Director at Board meetings or by the Committee Chairs at Committee meetings.

BOARD LEADERSHIP STRUCTURE

Chairman and CEO Roles

Although the Board of Directors has the authority to separate the positions of Chairman and CEO if it deems appropriate, the Board believes it is in the best interest of the Company’s shareholders to combine them. Doing so enables one person to guide the Board in setting priorities for the Company and in addressing the risks and challenges the Company faces. The Board of

2018 PROXY STATEMENT   11​

CORPORATE GOVERNANCE AT PHILLIPS 66

Directors believes that, while its non-employee directors bring a diversity of skills and perspectives to the Board, the Company’s CEO, by virtue of his day-to-day involvement in managing the Company, currently is best suited to serve as Chairman and perform this unified role.

The Board of Directors believes that no single organizational model is the most effective in all circumstances. As a consequence, the Board periodically considers whether the offices of Chairman and CEO should continue to be combined and who should serve in such capacities.

Independent Director Leadership

Glenn Tilton has served as our Lead Director since February 2016. In appointing a Lead Director, the Board of Directors considered it useful and appropriate to designate an independent director to serve in a lead capacity to coordinate the activities of the non-employee directors and to perform such other duties and responsibilities as the Board of Directors may determine. Specifically, those duties include:

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advising the Chairman on an appropriate schedule of Board meetings, seeking to ensure that the non-employee directors can perform their duties responsibly without interfering with operations;

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providing the Chairman with input on the preparation of the agenda for each Board meeting and assuring that there is sufficient time for discussion of all agenda items;

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advising the Chairman on the quality, quantity and timeliness of the flow of information from management to the non-employee directors in order that they may perform their duties effectively and responsibly, including specifically requesting certain materials be provided to the Board;

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recommending to the Chairman the retention of consultants who report directly to the Board of Directors;

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interviewing all board candidates and making nomination recommendations to the Nominating Committee and the Board of Directors;

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assisting the Board of Directors and Company officers in assuring compliance with and implementation of the Corporate Governance Guidelines;

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ensuring that he or she, or another appropriate director, is available for engagement with shareholders when warranted;

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having the authority to call meetings of the non-employee directors, as well as to develop the agenda for and moderate any such meetings and executive sessions of the non-employee directors;

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acting as principal liaison between the non-employee directors and the Chairman on sensitive issues;

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participating with the Human Resources and Compensation Committee in the periodic discussion of CEO performance;

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ensuring the Board of Directors conducts an annual self-assessment and meeting with the CEO to discuss the results of the annual self-assessment; and,

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working with the Nominating Committee to recommend the membership of the various Board committees, as well as selection of the committee chairs.

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The Board of Directors believes that its current structure and processes encourage its non-employee directors to be actively involved in guiding its work. The chairs of the Board’s committees review their respective agendas and committee materials in advance of each meeting, communicating directly with other directors and members of management as each deems appropriate. Moreover, each director is free to suggest agenda items and to raise matters at Board and committee meetings that are not on the agenda.

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CORPORATE GOVERNANCE AT PHILLIPS 66​

BOARD MEETINGS, COMMITTEES, AND MEMBERSHIP

The Board of Directors met six times in 2017. Each director attended at least 75 percent of the meetings of the Board and committees on which they served.

Recognizing that director attendance at the Company’s Annual Meeting can provide the Company’s shareholders with an opportunity to communicate with the directors about issues affecting the Company, the Company actively encourages directors to attend the Annual Meeting of Shareholders. All of our directors attended the 2017 Annual Meeting of Shareholders.

BOARD COMMITTEE MEMBERSHIP

The membership of the Board committees is set forth below.

The charters for our Audit Committee, Executive Committee, Compensation Committee, Nominating Committee, and Public Policy Committee can be found in the “Investors” section on the Phillips 66 website under the “Corporate Governance” caption. Shareholders may also request printed copies of these charters by following the instructions located under AVAILABLE INFORMATION.

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CORPORATE GOVERNANCE AT PHILLIPS 66

Committees of the Board

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CORPORATE GOVERNANCE AT PHILLIPS 66​

BOARD’S ROLE IN RISK OVERSIGHT

The Company’s management is responsible for the day-to-day conduct of our businesses and operations, including management of risks the Company faces. To fulfill this responsibility, our management has established an enterprise risk management (ERM) program designed to identify and facilitate management of the significant and diverse risks facing the Company and the approaches to addressing risks.

The Board of Directors has broad oversight responsibility over the Company’s ERM program and receives management updates on its development and implementation. In this oversight role, the Board of Directors is responsible for satisfying itself that the risk management processes designed and implemented by the Company’s management are functioning as intended, and that necessary steps are taken to foster a culture of risk-adjusted decision making throughout the organization.

The Board of Directors exercises its oversight responsibility for risk assessment and risk management directly and through its committees. However, the full Board maintains responsibility for oversight of strategic risks. Setting the strategic course of the Company and providing oversight of strategic risks involves a high level of constructive engagement between management and the Board. The Board regularly discusses the strategic priorities of the Company and the risks to the Company’s successful execution of its strategy, including global economic and other significant trends, as well as changes in the energy industry and regulatory initiatives.

The Board of Directors receives regular updates from its committees on individual areas of risk falling within each committee’s area of oversight and expertise, as outlined below.

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CORPORATE GOVERNANCE AT PHILLIPS 66

Committee Risk Oversight Responsibilities

Audit and Finance Committee

The Audit Committee has primary responsibility for overseeing the Company’s ERM program and has been delegated responsibility to facilitate coordination among the Board’s committees with respect to the Company’s risk management programs.

The Audit Committee is responsible for the integrity of the Company’s financial statements; the independent auditors’ qualifications and independence; the performance of the Company’s internal audit function; and its system of internal controls. The Audit Committee also reviews and receives briefings concerning information security (including cybersecurity), compliance with laws and regulatory requirements, and major financial exposures.

Human Resources and Compensation Committee

The Compensation Committee oversees the Company’s compensation programs and the Company’s talent management program. The Compensation Committee evaluates whether our programs and practices create excessive risks and determines whether any changes to those programs and practices are warranted. The Compensation Committee also ensures that our compensation programs align with long-term interests of shareholders and are effective in retaining top talent. Finally, the Compensation Committee ensures the development of a diverse talent pool with respect to CEO and senior management succession planning.

Nominating and Governance Committee

The Nominating and Governance Committee reviews policies and practices in the area of corporate governance and is responsible for overseeing Board composition and director qualifications through the nomination process. Additionally, the Committee is responsible for CEO succession planning.

Public Policy Committee

The Public Policy Committee assists the Board in identifying, evaluating and reviewing social, political and environmental trends and related risks. It also reviews management’s proposed actions to anticipate and adjust to such trends and manage risks to achieve the Company’s long-term business goals. The Public Policy Committee reviews and makes recommendations to the full Board on the Company’s policies, programs and practices relating to health, safety and environmental protection, government relations and political contributions, and corporate responsibility.

RELATED PARTY TRANSACTIONS

Our Code of Business Ethics and Conduct requires that all directors and executive officers promptly report any transactions or relationships that reasonably could be expected to constitute a related party transaction. The transaction or relationship is reviewed by the Company’s management and the appropriate committee of the Board to ensure that it does not constitute a conflict of interest and is appropriately disclosed.

Additionally, the Nominating Committee conducts an annual review of related party transactions between each director and the Company and its subsidiaries in making recommendations to the Board regarding the continued independence of each director. In 2017, there were no related party transactions in which the Company or a subsidiary was a participant and in which any director, executive officer, or any of their immediate family members had a direct or indirect material interest.

The Nominating Committee also considered relationships that, while not constituting related party transactions where a director had a direct or indirect material interest, nonetheless involved transactions between the Company and an organization with which a director is affiliated, either directly or as a partner, shareholder or officer. Included in its review were ordinary course of business transactions with companies employing a director, such as ordinary course of business transactions with ITT Inc., of which Ms. Ramos serves as CEO and President. The Nominating Committee determined that there were no transactions impairing the independence of any member of the Board.

On February 13, 2018, we entered into a Stock Purchase and Sale Agreement with Berkshire Hathaway Inc., a more than 5% shareholder, and one of its wholly-owned subsidiaries to repurchase 35 million shares of our common stock for an aggregate purchase price of approximately $3.3 billion. The purchase price for the shares was based on the volume weighted average price of our common stock on the NYSE on the date of the agreement, which closed on February 14, 2018.

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CORPORATE GOVERNANCE AT PHILLIPS 66​

COMMUNICATIONS WITH THE BOARD

To support shareholder engagement, the Company maintains a process for shareholders and interested parties to communicate with non-employee directors. Shareholders and interested parties may communicate with the non-employee directors by contacting our Corporate Secretary, Paula A. Johnson, as provided below:

Relevant communications are distributed to the Board of Directors or to any individual director or directors, as appropriate, depending on the facts and circumstances outlined in the communication. In that regard, the Board has requested that certain items unrelated to its duties and responsibilities not be distributed, such as: business solicitations or advertisements; junk mail and mass mailings; new product suggestions; product complaints; product inquiries; résumés and other forms of job inquiries; spam; and surveys. In addition, material that is considered hostile, threatening, illegal or similarly unsuitable will be excluded. Any communication that is filtered out is made available to any non-employee director upon request.

2018 PROXY STATEMENT   17​

PROPOSAL 1:

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Our By-Laws provide that the directors are divided into three classes, which are to be as nearly equal in size as possible, with one class being elected each year. The Board of Directors has set the current number of directors at ten, with two classes of three directors each and one class of four directors. Any director vacancies created between annual shareholder meetings (such as by a current director’s death, resignation or removal for cause or an increase in the number of directors) may be filled by a majority vote of the remaining directors then in office. Any director appointed in this manner would hold office for a term expiring at the annual meeting of shareholders at which the term of office of the class to which he or she has been appointed expires. If a vacancy resulted from an action of our shareholders, only our shareholders would be entitled to elect a successor.

We expect each nominee will be able to serve if elected. If, however, a nominee is unable to serve and the Board of Directors does not elect to reduce the size of the Board, shares represented by proxies will be voted for a substitute nominated by the Board of Directors.

The names, principal occupations and certain other information about each nominee for director, as well as key experiences, qualifications, attributes and skills that led the Nominating Committee to conclude that each nominee is currently qualified to serve as a director, are set forth on the following pages.

For information on the compensation of our non-employee directors, please see NON-EMPLOYEE DIRECTOR COMPENSATION.

Nominees for Directors to be Elected at the 2018 Annual Meeting for a Three-Year Term Ending at the 2021 Annual Meeting

Each nominee requires the affirmative vote of a majority of the votes cast in person or by proxy at the meeting.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” EACH OF THE FOLLOWING DIRECTOR NOMINEES.

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PROPOSAL 1:  Election of Directors​

The following directors will continue in office until the end of their respective terms. Included below is a listing of each continuing director’s name, age, tenure and qualifications:

Directors Whose Terms Expire at the 2019 Annual Meeting

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PROPOSAL 1:  Election of Directors

Directors Whose Terms Expire at the 2019 Annual Meeting

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PROPOSAL 1:  Election of Directors​

Directors Whose Terms Expire at the 2020 Annual Meeting

2018 PROXY STATEMENT   21​

PROPOSAL 2:

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The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent registered public accounting firm retained to audit the Company’s financial statements. The Audit Committee has appointed Ernst & Young LLP to serve as the Company’s independent registered public accounting firm for fiscal year 2018. Ernst & Young has acted as the Company’s independent registered public accounting firm continuously since 2011.

The Audit Committee annually considers the independence of the Company’s independent auditors prior to the firm’s engagement, and periodically considers whether a regular rotation of the independent auditors is necessary to assure continuing independence. The Audit Committee and its Chairman are directly involved in the selection of Ernst & Young’s lead engagement partner.

The Audit Committee and the Board of Directors believe that the continued retention of Ernst & Young is in the best interests of the Company and its shareholders. We are asking you to vote on a proposal to ratify the appointment of Ernst & Young.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP.

The submission of this matter for approval by shareholders is not legally required, but the Board and the Audit Committee believe it provides an opportunity for shareholders to vote on an important aspect of corporate governance. If the shareholders do not ratify the selection of Ernst & Young, the Audit Committee will reconsider the selection of that firm as the Company’s independent registered public accounting firm. Even if the selection is ratified, the Audit Committee may in its discretion select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and its shareholders.

Services Provided by the Independent Registered Public Accounting Firm

Audit services of Ernst & Young for fiscal year 2017 included an audit of our consolidated financial statements, an audit of the effectiveness of the Company’s internal control over financial reporting, and services related to periodic filings made with the SEC. Additionally, Ernst & Young provided certain other services as described below. In connection with the audit of the 2017 consolidated financial statements, we entered into an engagement agreement with Ernst & Young that set forth the terms by which Ernst & Young performed audit services for us.

The Audit Committee is responsible for negotiating the audit fee associated with its retention of Ernst & Young. Ernst & Young’s fees for professional services totaled $12.8 million for 2017 and $14.5 million for 2016, which consisted of the following:

(1)

Fees for audit services related to the fiscal year consolidated audit, the audit of the effectiveness of internal controls, quarterly reviews, registration statements, comfort letters, statutory and regulatory audits and accounting consultations. Includes audit fees of Phillips 66 Partners LP of  $1.7 million and $3.3 million for 2017 and 2016, respectively, which were approved by the Audit Committee of the General Partner of Phillips 66 Partners LP.

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(2)

Fees for audit-related services related to audits in connection with proposed or consummated dispositions, benefit plan audits, other subsidiary audits, special reports, and accounting consultations.

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(3)

Fees for tax services related to tax compliance services and tax planning and advisory services.

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The Audit Committee has considered whether the non-audit services provided to Phillips 66 by Ernst & Young impaired the independence of Ernst & Young and concluded they did not.

The Audit Committee has adopted a pre-approval policy that provides guidelines for the audit, audit-related, tax and other non-audit services that Ernst & Young may provide to the Company. All of the fees in the table above were approved in accordance with this policy. The policy (a) identifies the guiding principles that must be considered by the Audit Committee in approving services to ensure that Ernst & Young’s independence is not impaired; (b) describes the audit, audit-related, tax and other services that may be provided and the non-audit services that are prohibited; and (c) sets forth pre-approval requirements

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AUDIT AND FINANCE COMMITTEE REPORT​

for all permitted services. Under the policy, the Audit Committee must pre-approve all services to be provided by Ernst & Young. The Audit Committee has delegated authority to approve permitted services to its Chair. Such approval must be reported to the entire Audit Committee at its next scheduled meeting.

One or more representatives of Ernst & Young are expected to be present at the Annual Meeting. The representatives will have an opportunity to make a statement if they desire and will be available to respond to appropriate questions from shareholders.

The Audit Committee assists the Board of Directors in fulfilling its responsibility to provide independent, objective oversight of the financial reporting functions and internal control systems of Phillips 66. The Audit Committee currently consists of five non-employee directors. The Board has determined that each member of the Audit Committee satisfies the requirements of the NYSE as to independence, financial literacy and expertise. The Board has further determined that each of J. Brian Ferguson, William R. Loomis, Jr., John E. Lowe, and Denise L. Ramos is an audit committee financial expert as defined by the SEC. The responsibilities of the Audit Committee are set forth in the written charter adopted by the Board of Directors, which is available in the “Investors” section of the Company’s website under the caption “Corporate Governance.” One of the Audit Committee’s primary responsibilities is to assist the Board in its oversight of the integrity of the Company’s financial statements. The following report summarizes certain of the Audit Committee’s activities in this regard for 2017.

Review with Management.   The Audit Committee has reviewed and discussed with management the audited consolidated financial statements of Phillips 66 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, included therein.

Discussions with Independent Registered Public Accounting Firm.   The Audit Committee has discussed with Ernst & Young LLP, independent registered public accounting firm for Phillips 66, the matters required to be discussed by Auditing Standard (AS) No. 1301 as adopted by the Public Company Accounting Oversight Board. The Audit Committee has received the written disclosures and the letter from Ernst & Young required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence, and has discussed with that firm its independence from Phillips 66.

Recommendation to the Phillips 66 Board of Directors.   Based on its review and discussions noted above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements of Phillips 66 be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

AUDIT AND FINANCE COMMITTEE

J. Brian Ferguson, Chairman
William R. Loomis, Jr.
John E. Lowe
Denise L. Ramos
Victoria J. Tschinkel

2018 PROXY STATEMENT   23​

PROPOSAL 3:

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Shareholders are being asked to vote on the following advisory (non-binding) resolution:

RESOLVED, that the shareholders approve the compensation of Phillips 66’s Named Executive Officers (NEOs) as described in this proxy statement in the COMPENSATION DISCUSSION AND ANALYSIS section and in the EXECUTIVE COMPENSATION TABLES (together with the accompanying narrative disclosures).

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE ADVISORY APPROVAL OF THE COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS.

Approval of this proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the proposal.

As required by the U.S. federal securities laws, Phillips 66 is providing shareholders with the opportunity to vote on an advisory resolution, commonly known as “Say-on-Pay,” considering approval of the compensation of its NEOs.

The Compensation Committee, which is responsible for the compensation of our CEO and Senior Officers (as defined in ROLE OF THE HUMAN RESOURCES AND COMPENSATION COMMITTEE), has overseen the development of compensation programs designed to attract, retain and motivate executives who enable us to achieve our strategic and financial goals. The COMPENSATION DISCUSSION AND ANALYSIS and the EXECUTIVE COMPENSATION TABLES, together with the accompanying narrative disclosures, allow you to view the trends in compensation and application of our compensation philosophies and practices for the years presented.

The Board of Directors believes that the Phillips 66 executive compensation programs align the interests of our executives with those of our shareholders. Our compensation programs are guided by the philosophy that the Company’s ability to provide sustainable value is driven by superior individual performance. The Board believes that a company must offer competitive compensation to attract and retain experienced, talented and motivated employees. In addition, the Board believes employees in leadership roles within the organization are motivated to perform at their highest levels when performance-based pay represents a significant portion of their compensation. The Board believes that our philosophy and practices have resulted in executive compensation decisions that are aligned with Company and individual performance, are appropriate in value, and have benefited the Company and its shareholders.

Because your vote is advisory, it will not be binding upon the Board of Directors. Nevertheless, the Compensation Committee and the Board will consider the outcome of the vote when evaluating future executive compensation arrangements. However, votes for or against our compensation programs will not necessarily inform the Compensation Committee and the Board about which elements of those programs shareholders approve or disapprove. For this reason, the Board encourages shareholders to engage with us to allow the Compensation Committee to understand shareholders’ views and consider that feedback when making decisions.

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This Compensation Discussion and Analysis details our executive compensation programs for 2017 and provides the decisions that the Compensation Committee made regarding 2017 compensation supported by our performance.

2017 COMPANY PERFORMANCE SUMMARY

Our 2017 performance results and strategic highlights are presented below. Some of these results are not measures of financial performance under U.S. generally accepted accounting principles (GAAP), for which more information is available in Appendix A.

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COMPENSATION DISCUSSION AND ANALYSIS

EXECUTIVE COMPENSATION PROGRAM SUMMARY

We operate in a volatile industry; however, our diversified portfolio enables us to be resilient through industry cycles. Through our disciplined capital allocation model, we increase our enterprise value by strategically investing capital in our higher-valued businesses while returning a significant portion of capital to shareholders through dividends and share repurchases.

Since our inception in 2012, we have operated with clear overriding objectives—enable our high-performing workforce to execute our corporate strategy efficiently and effectively, while remaining vigilant and focused on safety and operating excellence, in order to deliver profitable growth, optimize returns, and grow secure and competitive dividends.

Based on the positive result of our 2017 say-on-pay vote, we believe our shareholders approve of our executive compensation program and recognize its link to our business strategy. Although the Compensation Committee continuously evaluates our compensation program in light of evolving best practices to ensure alignment with shareholder interests, no changes were made to our executive compensation program in 2017 as a result of the say-on-pay vote.

Our 2017 NEOs were:

Philosophy and Overriding Principles

Our Compensation Philosophy remains unchanged and supports our vision of providing energy and improving lives.

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Ensure executive compensation drives behaviors and actions consistent with shareholder interests, prudent risk-taking and a long-term perspective.

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Ensure executive compensation allows us to attract, retain, motivate, and reward high-performing executive talent, as well as support succession planning. We target reasonable and competitive compensation, aligned with market median levels.

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Differentiate based on performance relative to targets/peers and market conditions. Executives have a significant portion of compensation tied to the achievement of annual and long-term goals that promote shareholder value creation.

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Emphasize Phillips 66 stock ownership by requiring stock ownership levels for our executives.

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Limit executive perquisites to items that serve a reasonable business purpose and are common in our peer group.

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Engage with shareholders on corporate governance topics, including executive compensation.

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Additionally, we provide executives the same group benefit programs as we provide other employees, on substantially the same terms.

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COMPENSATION DISCUSSION AND ANALYSIS​

Compensation Programs

The following table summarizes the principal elements of executive compensation and the performance drivers of each element.

(1)

The Compensation Committee believes that stock options are inherently performance-based, as options have no initial value and grantees only realize benefits if the value of our stock increases above the option price following the date of grant. This practice is intended to ensure that the interests of our NEOs are aligned with those of our shareholders.

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Compensation Mix Puts Significant Pay at Risk

Consistent with our philosophy that executive compensation should be linked to Company performance and directly aligned with shareholder value creation, a significant portion of NEO compensation is at risk and based on performance metrics tied to our corporate strategy. “At risk” means there is no guarantee that the target value of the awards will be realized. Based on its evaluation of performance, the Compensation Committee has authority to reduce, and even award nothing for, the performance-based payouts and individual performance adjustments under each of the VCIP and PSP. Stock options can expire with zero value if the price of our common stock does not appreciate above the grant date price over the 10-year term of the options. RSUs may lose value depending on stock price performance. Therefore, for NEOs to earn and sustain competitive compensation, the Company must meet its strategic objectives, perform well relative to peers, and deliver market-competitive returns to shareholders.

CEO target compensation mix is 89 percent at risk and 71 percent performance-based. The target mix for the other NEOs is 82 percent at risk and 65 percent performance-based. Further, LTI awards make up 72 percent of the CEO and 65 percent of other NEOs target compensation mix. For both the CEO and other NEOs, target mix percentages are commensurate with their levels of responsibility. Further detail on all of these programs is provided in EXECUTIVE COMPENSATION PROGRAM DETAILS.

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COMPENSATION DISCUSSION AND ANALYSIS

The target mix of the compensation program elements for the CEO and other NEOs is shown below. The charts outline the relative size, in percentage terms, of each element of targeted compensation.

Aligned with Best Practices

The following best practices are reflected in our executive compensation programs:

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COMPENSATION DISCUSSION AND ANALYSIS​

EXECUTIVE COMPENSATION PROGRAM DETAILS

The following provides a more detailed look at our executive compensation programs.

Base Salary

Base salary is designed to provide a competitive and fixed rate of pay recognizing employees’ different levels of responsibility and performance. As the majority of our NEO compensation is performance-based and tied to long-term programs, base salary represents a less significant component of total compensation. In setting each NEO’s base salary, the Compensation Committee considers factors including, but not limited to, the responsibility level for the position held, market data from the compensation peer group for comparable roles, experience and expertise, individual performance and business results.

Below is a summary of the annualized base salary for each NEO for 2017. Because these amounts reflect each NEO’s annualized salary as of the dates indicated, this information may vary from the information provided in the SUMMARY COMPENSATION TABLE, which reflects actual base salary earnings in 2017, including the effect of salary changes during the year.

All NEOs received base salary increases effective March 1, 2017, as part of the annual merit cycle for all employees. These merit increases in base salary realigned each applicable NEO’s base salary with the respective compensation peer group levels and reflected each NEO’s achievement of established performance requirements corresponding to his or her role. The Compensation Committee determined these adjustments were appropriate to maintain our competitiveness in the market.

Variable Cash Incentive Program

The VCIP, which is our annual incentive program, is designed to provide variability and differentiation based on corporate and individual performance. Through our metrics, we designed our VCIP program to align annual awards with shareholder interests and execution of our corporate strategy. We do not tie NEO VCIP awards to the performance of any individual business unit. We believe this structure serves the best interests of shareholders as it promotes collaboration across the organization.

Eligible earnings are multiplied by a percentage that is based on each NEO’s salary grade level to derive the NEO’s target award. At the end of the performance period, the Compensation Committee reviews the Company’s performance to determine the Corporate Payout Percentage. This percentage is based on a mix of operational and financial metrics, the details and weighting of which are described below. The Compensation Committee can award a Corporate Payout Percentage of zero up to the maximum of 200 percent.

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COMPENSATION DISCUSSION AND ANALYSIS

The target award is multiplied by the Corporate Payout Percentage, after which the Compensation Committee takes into account the individual accomplishments of each NEO when determining applicable Individual Performance Adjustments. Individual Performance Adjustments can range from +/–50 percent of the target award. Adjustments are based on measurable performance of the individual NEO that drives shareholder value.

For 2017, the Compensation Committee used the following metrics, which are aligned with our corporate strategy, to evaluate corporate performance under the VCIP. This mix of financial and operational metrics was designed to ensure a balanced view of Company performance.

Adjusted EBITDA

We believe Adjusted EBITDA is useful in evaluating our annual core operating performance and how we determine enterprise value. Our threshold represents the Adjusted EBITDA required to cover our sustaining capital and shareholder dividend commitments. To ensure we continue to deliver on our growth strategy, the target and maximum for Adjusted EBITDA represent returns that are 1.5 percent and 3.0 percent above our Weighted Average Cost of Capital (WACC), respectively.

Based on actual Company performance, the Compensation Committee determined that a payout of 86 percent of target was earned for this metric. Overall performance was 13 percent below target due primarily to market volatility, which was partially offset by exceptional operating excellence. Adjusted EBITDA, as used for VCIP, is a non-GAAP financial measure. See Appendix A for additional information.

Operating Excellence

Operating excellence, including personal and process safety, environmental stewardship and asset availability, is critical to meeting our corporate strategy of growth, returns and distributions. We measure ourselves against others in our industry for safety metrics, target sustained performance in environmental stewardship, and effectively manage unplanned downtime.

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COMPENSATION DISCUSSION AND ANALYSIS​

For metrics for which comparative data was available, like TRR, Lost Workday Case Rate (LWCR), and PSE Rate, we benchmarked ourselves against companies with the strongest safety records in our industry. Generally, these companies fall within the top 2 quartiles of all companies reported. We then established our threshold, target, and maximum goals based on the 25th, 50th, and 75th percentiles of this group of companies.

For metrics for which comparative data was not available, like asset availability and environmental events, we established our threshold, target, and maximum goals based on our own historical performance, with a goal of continuous improvement. For asset availability, we incorporate all of the lines of our business, and then weight them by EBITDA.

In 2017, we met or exceeded our maximum stretch goal in all five areas measured for Operating Excellence. However, at the recommendation of the CEO, the Compensation Committee approved a 20% reduction in the payout for combined TRR and PSE Rate to acknowledge a serious incident that resulted in a fatality in February 2017.

The Compensation Committee reviewed each of the following metrics when determining an overall Operating Excellence payout of 192 percent.

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Combined TRR and LWCR:   Our performance in LWCR was top quartile compared to our industry group, earning 200 percent of target. While 200 percent of target was also earned for combined TRR, the Compensation Committee reduced the payout by 20 percent as noted above, resulting in a 180 percent payout.

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PSE Rate:   Our PSE Rate in 2017 was top quartile performance. While 200 percent of target was earned for PSE, the Compensation Committee reduced the payout by 20 percent as noted above, resulting in a 180 percent payout.

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Environmental Events:   The Compensation Committee considered that in the industries in which we operate there is increasingly stringent regulation and scrutiny on environmental performance. We not only beat our stretch goal, but also were 15 percent improved versus the prior year, setting record performance in our Company history. As a result, 200 percent of target was earned related to this metric.

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Asset Availability:   The Compensation Committee confirmed that our availability of 97.6 percent across all of our lines of business resulted in a payout of 200 percent of target.

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Adjusted Controllable Costs

Adjusted Controllable Costs focuses on operating excellence and our ability to deliver differentiated returns to shareholders. Our targets for threshold, target, and maximum goals are based on our budget for the current year. For threshold performance, Adjusted Controllable Costs could not exceed budget by more than 3 percent, target performance was based on achieving budget, and maximum performance required being at least 3 percent under budget.

2018 PROXY STATEMENT   31​

COMPENSATION DISCUSSION AND ANALYSIS

In 2017, we were 2 percent improved versus our budget, resulting in a payout of 173 percent. Our lower costs relative to budget were related to environmental insurance recoveries, ongoing equipment efficiencies, and lower staff costs. Adjusted Controllable Costs is a non-GAAP financial measure. See Appendix A for additional information.

High-Performing Organization

We believe maintaining and enhancing a high-performing organization is critical to our success. Our employees promote our culture and are integral to achieving our strategic goals and maximizing long-term shareholder value. We measure our performance relative to the following:

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Foundational metrics aimed at assessing the engagement of our workforce and inclusion and diversity health of our organization. These metrics include:

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overall quality and diversity of new hires;

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employee and leadership development through rotational moves;

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leadership development through effective succession management; and,

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overall retention of the right talent.

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Achievement of corporate priorities centered around promoting our culture, building capabilities, and maximizing the performance of our people.

​

•

Response and adaptation to changing market conditions. Our headquarters, Sweeny Refinery, six terminals, and several pipelines—staffed by over 25 percent of our global workforce—were impacted by Hurricane Harvey in August 2017. Almost all assets were functioning at normal capacity by mid-September, with no environmental events or safety incidents. We donated $4 million in charitable relief efforts and were named one of the “Most Philanthropic Companies in Houston” for 2017, demonstrating our commitment to improving lives and being a good corporate partner in the communities in which we operate. We also provided $4.3 million to our impacted employees in emergency cash and interest fee loans.

​

We strive for continuous improvement of our high-performing organization, as we believe it is our employees that differentiate us in the market place. Based on our performance, the Compensation Committee determined that 120 percent of target was earned for High-Performing Organization.

32   2018 PROXY STATEMENT

COMPENSATION DISCUSSION AND ANALYSIS​

Total Corporate Payout

The formulaic result of our individual metrics was a Total Corporate Payout of 140 percent, as summarized in the following table.

Individual Performance Highlights

The Compensation Committee has the authority to adjust our NEOs’ individual VCIP payouts by +/–50 percent of the formula-based target payout. The Compensation Committee may apply an individual performance adjustment to reflect project-based accomplishments that drove or detracted from shareholder value or for market-based considerations to more closely align the payout with shareholder returns. This flexibility allows us to reflect our unique business strategy and portfolio of assets as well as differentiate individual executive performance. The Compensation Committee made adjustments to individual VCIP payouts for NEOs based on their responsibility for the success of projects and initiatives that lead to the successful execution of our strategy.

The Compensation Committee approved total payouts for each of our NEOs as shown in the table below.

Long-Term Incentive Programs

Our programs deliver 50 percent of long-term target value in the form of Performance Share Units (PSUs), 25 percent in the form of stock options and 25 percent in the form of RSUs.

We believe this mix of awards is aligned with our compensation philosophy, reflects the cyclical nature of our business, promotes retention of our high-performing talent, supports succession planning and is consistent with market practice.

2018 PROXY STATEMENT   33​

COMPENSATION DISCUSSION AND ANALYSIS

Performance Share Program

Each PSP has a three-year performance period, and therefore three PSPs are in progress at any time. By delivering 50 percent of LTI through the PSP, a significant portion of NEO compensation is tied to Company and individual performance.

Target Shares at Beginning of Performance Period.   The Compensation Committee uses the Compensation Peer Group to benchmark LTI and establish base salary multiples for similar roles at peer organizations. The number of target shares is determined by dividing the multiple by the average of the stock’s fair market value for the 20 days prior to the start of the performance period, less anticipated dividends during the performance period.

The Compensation Committee assesses the individual performance of each NEO, and based on that assessment may adjust an award by up to +/–30 percent of the target amount at grant. The CEO provides input regarding awards made to all NEOs (other than himself). The Compensation Committee evaluates the individual performance of the CEO. The Compensation Committee believes in applying performance adjustments to the number of target shares at the beginning of the performance period, rather than the end, so that performance-adjusted compensation is subject to company performance and market volatility throughout the performance period, aligning executive compensation with shareholder interests.

•

Target shares may be adjusted during the performance period for significant changes in responsibility that occur during the performance period.

​

•

NEOs hired after the start of the performance period may receive prorated target shares in ongoing PSP cycles, at the discretion of the Compensation Committee, so that their interests are immediately aligned with the Company long-term goals and shareholder interests.

​

Performance Metrics.   The performance metrics used for all three current PSP programs are 50 percent ROCE, equally weighted between absolute and relative, and 50 percent relative TSR.

The Compensation Committee considers ROCE an important measure of Company growth and overall performance. The Compensation Committee evaluates our results relative to our Performance Peer Group as well as absolute targets based on our WACC.

•

The absolute ROCE threshold is a return percentage equivalent to the Adjusted EBITDA required to cover our sustaining capital and shareholder dividend commitments during the 3-year performance period.

​

•

The absolute ROCE target delivers 1.5 percent above our WACC over the performance period.

​

•

The absolute ROCE maximum delivers 3.0 percent above WACC over the performance period.

​

The Compensation Committee also recognizes that relative TSR is the most common standard for relative comparisons to peers. Our performance is evaluated as compared to our Performance Peer Group and the S&P 100 Index.

34   2018 PROXY STATEMENT

COMPENSATION DISCUSSION AND ANALYSIS​

For our current PSP programs, this translates into the following goals:

(1)

Threshold for PSP 2016-2018 will be an average of 2016 (4.4%), 2017 (2.8%), and the ROCE necessary to deliver sustaining capital and dividend commitments in 2018. This number will not be known until after 2018 year-end. Threshold for PSP 2017-2019 will be an average of 2017 (2.8%), and the ROCE necessary to deliver sustaining capital and dividend commitments in 2018 and 2019. The 2019 number will not be known until after 2019 year-end.

​

(2)

Target for PSP 2016-2018 will be an average of 2016 (10.8%), 2017 (9.9%), and the ROCE necessary to deliver WACC plus 1.5% in 2018. This number will not be known until after 2018 year-end. Target for PSP 2017-2019 will be an average of 2017 (9.9%), and the ROCE necessary to deliver WACC plus 1.5% in 2018 and 2019. The 2019 number will not be known until after 2019 year-end.

​

(3)

Maximum for PSP 2016-2018 will be an average of 2016 (12.3%), 2017 (11.4%), and the ROCE necessary to deliver WACC plus 3.0% in 2018. This number will not be known until after 2018 year-end. Maximum for PSP 2017-2019 will be an average of 2017 (11.4%), and the ROCE necessary to deliver WACC plus 3.0% in 2018 and 2019. The 2019 number will not be known until after 2019 year-end.

​

Settlement.   Awards under all of the current PSP programs are denominated in shares, but are intended to be paid in cash at the end of their respective performance periods. Performance can range from 0-200 percent of target.

Active PSP Programs.   The programs in effect during 2017 were the PSP 2015-2017, PSP 2016-2018, and PSP 2017-2019.

After the close of the PSP 2015-2017, the Compensation Committee considered the following results when approving the payout of 120 percent.

•

Absolute ROCE:   Our PSP Absolute ROCE for the three-year performance period was 10.1 percent, or 0.3 percentage points below target, resulting in a payout of 97 percent of target for PSP Absolute ROCE, also weighted at 25 percent. Absolute ROCE, as used in our PSP program, is a non-GAAP financial measure. See Appendix A for additional information.

​

•

Relative ROCE:   Our relative performance for the three-year performance period was 7th out of 16 peer companies, resulting in a payout of 117 percent for PSP Relative ROCE, which was weighted at 25 percent.

​

2018 PROXY STATEMENT   35​

COMPENSATION DISCUSSION AND ANALYSIS

•

Relative TSR:   Our TSR for the three-year performance period was 55.1 percent, 7th out of 17 peers (including the S&P 100 Index) on a relative basis, resulting in a payout of 129 percent of target for Relative TSR, which was weighted at 50 percent.

​

Accordingly, the Compensation Committee approved payouts for all of our NEOs for PSP 2015-2017. The payment was made in February 2018 and is described further in the footnotes of the SUMMARY COMPENSATION TABLE.

Stock Option Program

In 2017, 25 percent of the LTI target value was delivered to executives in the form of stock options. These awards are inherently performance-based, as the stock price must increase before the executive can realize any gain. We believe stock options drive behaviors and actions that enhance long-term shareholder value.

Stock options are typically granted in February each year. The number of options awarded is calculated based on the Black-Scholes-Merton model. The exercise price of stock options is set at 100 percent of the fair market value of our common stock on the date of grant. Stock options granted to our NEOs in February 2017 vest ratably over a three-year period and have a ten-year term. Stock options do not have voting rights and are not entitled to receive dividends.

Restricted Stock Units

In 2017, 25 percent of the LTI target value was delivered to executives in the form of RSUs. The Compensation Committee believes maintaining RSUs in our LTI program complements the overall compensation mix for our executives by:

•

driving the right behaviors and actions consistent with creating shareholder value;

​

•

providing diversification of compensation in recognition of the cyclical nature of our industry;

​

•

resulting in actual share ownership aligned with our stock ownership guidelines; and

​

•

supporting executive retention.

​

RSUs are typically granted in February each year. The number of units is determined based on the fair market value of the Company’s stock on the date of grant. RSUs awarded to our NEOs in February 2017 cliff vest at the end of the three-year holding period and will be delivered to the NEOs in the form of Company stock. These RSUs do not carry voting rights but do earn dividend equivalents during the vesting period. The Compensation Committee assesses the individual performance of each NEO, and based on that assessment may adjust an award by up to +/–30 percent of the target amount at grant. The CEO provides input regarding awards made to all NEOs (other than himself). The Compensation Committee evaluates the individual performance of the CEO.

36   2018 PROXY STATEMENT

COMPENSATION DISCUSSION AND ANALYSIS​

2017 LTI Compensation

The Compensation Committee approved the following LTI for the NEOs for 2017. The Compensation Committee considered the individual performance of each NEO as outlined above when determining the target values. These values do not reflect prospective promotional adjustments to PSP targets and may not match the accounting values presented in the GRANTS OF PLAN-BASED AWARDS table.

(1)

PSP 2017-2019 targets include individual adjustments for Mr. Herman (+10 percent), Ms. Johnson (+10 percent), and Mr. Taylor (+20 percent).

​

(2)

The Compensation Committee did not approve any individual adjustments to stock option targets.

​

(3)

RSU targets include individual adjustments for Mr. Herman (+10 percent), Ms. Johnson (+10 percent), and Mr. Taylor (+20 percent).

​

Peer Group Comparisons

We utilize a compensation peer group and a performance peer group. The Compensation Committee reviews these peer groups annually and adjusts as necessary. We find it necessary to have two differentiated peer groups because we are unique in our size and diversification of assets. Therefore, at the beginning of the year, we benchmark against large companies, as measured by asset value and market capitalization, to set target compensation using the compensation peer group. At the end of the year, in our closing Performance Share Program we assess our relative performance against peers in the industries in which we operate using the performance peer group. While our unique portfolio of assets provides an advantage to investors, it does necessitate using two peer groups to appropriately align compensation and assess performance.

Compensation Peer Group

Relative analysis.   We use the compensation peer group to evaluate and determine compensation levels for our NEOs, including base salary adjustments and targets for our annual bonus and LTI programs.

Criteria for selection.   Our compensation peer group is comprised of companies that have similar jobs and job scope as our NEOs. The compensation peer group primarily consists of large companies with significant capital investments and complex international operations.

Our compensation peer group includes companies that are comparable to Phillips 66 based on three primary criteria—assets, market capitalization, and business operations. Revenue is a secondary criteria due to the nature of our operations. The Compensation Committee believes utilizing each of these criteria is necessary in order to fully reflect the complex nature of our business and determine the optimal group of companies with which to compare Phillips 66.

2018 PROXY STATEMENT   37​

COMPENSATION DISCUSSION AND ANALYSIS

Companies included.   The table below shows the companies in our 2017 compensation peer group. At the time the compensation peer group was determined, we were, in comparison to this group, in the 59th percentile in assets, 47th percentile in market value, and 91st percentile in revenue.

Changes for 2018.   As part of its annual review of peer group composition, the Compensation Committee determined to make the following changes, beginning in 2018:

•

including Andeavor (ANDV), the successor to the combination of Tesoro Corporation and Western Refining Inc., and DowDuPont Inc. (DWDP), reflecting the merger of The Dow Chemical Company and E. I. du Pont de Nemours and Company;

​

•

adding Anadarko Petroleum Corporation (APC), ConocoPhillips (COP), Enterprise Products Partners L.P. (EPD), ExxonMobil Corporation (XOM), and Schlumberger Limited (SLB); and

​

•

removing 3M Company, The Boeing Company, Caterpillar Inc., Deere and Company, General Dynamics Corporation, Johnson Controls Inc., Lockheed Martin Corporation, and United Technologies Corporation.

​

The table below shows the compensation peer group that will be used beginning in 2018. At the time of the review and approval of the changes to the compensation peer group, we were, in comparison to the new group, in the 46th percentile in assets, 39th percentile in market value, and 75th percentile in revenue.

Performance Peer Group

Relative analysis.   The performance peer group is used to evaluate relative business results in our Performance Share Program. This includes both relative TSR and relative ROCE. We also evaluate our relative TSR performance against the S&P 100 Index, which the Compensation Committee believes is an appropriate comparison for performance purposes because the index reflects the companies with which we compete for capital in the broader market.

Criteria for selection.   Phillips 66 is uniquely positioned in the energy industry, with a large refining and marketing base, a growing midstream NGL business and significant petrochemical exposure. To reflect our unique portfolio of assets, we include companies operating in each of our three major businesses. We believe that our performance peer group is representative of the companies that investors use for relative performance comparisons.

38   2018 PROXY STATEMENT

COMPENSATION DISCUSSION AND ANALYSIS​

Companies included.   The table below shows the performance peer group that was established for evaluating both relative TSR and relative ROCE for the three year performance period ending December 31, 2017.

Following the conclusion of the performance period, the following mergers and acquisitions were reflected when evaluating relative performance:

•

In June 2017, Tesoro Corporation acquired Western Refining Inc. and the combined company changed its name to Andeavor (ANDV). Each Tesoro and Western Refining were in our performance peer group; after the acquisition we included the combined company.

​

•

In September 2017, The Dow Chemical Company and E. I. du Pont de Nemours and Company completed their merger, forming DowDuPont (DWDP). The Dow Chemical Company was previously in our performance peer group; following the merger we continued to include the combined company.

​

Changes for 2018.   The Compensation Committee approved the following changes to the performance peer group for performance periods beginning in 2018. These changes reflect the Committee’s desire to have the peers reflect the weighting of our different business segments to our consolidated results and include companies of similar size and scale. They also reflect the impact of merger and acquisition activity. Changes to the performance peer group for performance periods beginning in 2018 include:

•

recognizing Andeavor (ANDV) as the successor to Tesoro Corporation and Western Refining Inc.;

​

•

replacing DowDuPont (DWDP) with LyondellBasell Industries N.V. (LYB); and

​

•

removing Energy Transfer Equity L.P.

​

OTHER BENEFITS AND PERQUISITES

Below is a summary of other compensation elements available to our NEOs in addition to the base salary, VCIP, and LTI described previously:

Broad-Based Employee Benefit Programs

NEOs participate in the same basic benefits package available to our other U.S. salaried employees. This package includes qualified pension; 401(k) plan; medical, dental, vision, life, and accident insurance plans, as well as flexible spending arrangements for health care and dependent care expenses; and our matching gift program.

Additional Executive Perquisites

In line with our compensation philosophy to provide compensation and benefits aligned with market practice, we provide our NEOs financial planning and executive health benefits. These benefits were imputed to the executives and included in All Other Compensation in the SUMMARY COMPENSATION TABLE. We did not provide a gross-up for these benefits.

Comprehensive Security Program

The Board has adopted a comprehensive security program to address the increased security risks for certain senior executives. Mr. Garland and Mr. Taylor were the only NEOs in 2017 designated by the Board as requiring increased security under this program. The program allows for certain additional security measures in specific situations when the senior executive is traveling

2018 PROXY STATEMENT   39​

COMPENSATION DISCUSSION AND ANALYSIS

by car or airplane. An additional security review of the NEOs’ personal residences is also included. Any additional costs to the Company for these activities are reported as All Other Compensation and included in the SUMMARY COMPENSATION TABLE.

Executive Retirement Plans

We maintain the following supplemental retirement plans for our NEOs.

•

Voluntary Deferred Compensation Plan—This plan (the Phillips 66 Key Employee Deferred Compensation Plan, which we refer to as the KEDCP) provides tax-efficient retirement savings by allowing executives to voluntarily defer both the receipt and taxation of a portion of their base salary and annual bonus until a specified date or when they leave the Company. Further information on the KEDCP is provided in the NONQUALIFIED DEFERRED COMPENSATION table.

​

•

Defined Contribution Restoration Plan—This plan (the Phillips 66 Defined Contribution Make-Up Plan, which we refer to as the DCMP) restores benefits capped under our qualified defined contribution plan due to IRC limits. Further information on the DCMP is provided in the NONQUALIFIED DEFERRED COMPENSATION table.

​

•

Defined Benefit Restoration Plan—This plan (the Phillips 66 Key Employee Supplemental Retirement Plan, which we refer to as the KESRP) restores Company-sponsored benefits capped under the qualified defined benefit pension plan due to IRC limits. Further information on the KESRP is provided in the PENSION BENEFITS AS OF DECEMBER 31, 2017 table.

​

Executive Life Insurance

We provide life insurance policies to all U.S.-based employees with a face value approximately equal to their annual base salary. For our NEOs, the face value of this coverage is approximately two times their annual base salary.

Executive Severance and Change in Control Plans

We do not maintain individual severance or change in control (CIC) agreements with our executives. However, we maintain the Phillips 66 Executive Severance Plan (ESP) and the Phillips 66 CICSP to accomplish several specific objectives, including:

•

ensuring shareholder interests are protected during business transactions by providing benefits that promote senior management stability;

​

•

providing and preserving an economic motivation for participating executives to consider a business combination that might result in an executive’s job loss; and

​

•

competing effectively in attracting and retaining executives in an industry that features frequent acquisitions and divestitures.

​

Executives may not participate in both plans as a result of the same severance event. Among other benefits, the ESP provides a payment equal to one and one-half or two times the executive’s base salary, depending on salary grade level, and the executive’s current target annual bonus if he or she is involuntarily terminated without cause. The CICSP provides a payment equal to two or three times the sum of the executive’s base salary and the greater of his or her target bonus or average of the last two bonus payments, depending on salary grade level. The executive must be involuntarily terminated without cause in connection with a change in control or terminate employment for good reason within two years after the change in control to be eligible for CICSP payment. We believe this “double trigger” requirement is in the best interest of shareholders and is considered a best practice.

Details of potential payments under these plans are outlined in the POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL section. These plans do not provide any excise tax gross-up protections.

Personal Use of Company Aircraft

The primary purpose of our corporate aircraft is to facilitate Company business. In the course of conducting Company business, executives may occasionally invite a family member or other personal guest to travel with them to attend a meeting or function. When such travel is deemed taxable to the executive, we provide further payments to reimburse the costs of the inclusion of this item in his or her taxable income.

40   2018 PROXY STATEMENT

COMPENSATION DISCUSSION AND ANALYSIS​

EXECUTIVE COMPENSATION GOVERNANCE

Clawback Provisions

Short- and long-term compensation, deferred compensation and nonqualified retirement benefits received by any executive are subject to clawback provisions if financial or other data is materially misstated due to negligence or misconduct on the part of the executive, as determined by the Compensation and Audit Committees.

Stock Ownership

The Compensation Committee believes requiring executives to retain shares of Phillips 66 common stock helps align executive performance with shareholder value creation and mitigates compensation risk. Our stock ownership guidelines require executives to own Phillips 66 common stock, valued as a multiple of the executive’s base salary, within five years from the date the executive becomes subject to the guidelines, as shown below:

Shares of Phillips 66 common stock owned and RSUs are included when determining whether an executive has met the required ownership levels. Compliance with the stock ownership guidelines is reviewed annually. All NEOs currently comply with these stock ownership guidelines or are on track to comply within the applicable five-year period.

Tax Considerations—Internal Revenue Code Section 162(m)

The deductibility of compensation under IRC Section 162(m) is one of the factors the Compensation Committee considers when making executive compensation decisions. Although the Compensation Committee generally has attempted to structure elements of executive compensation to meet the requirements for deductibility, it has retained the flexibility to award compensation that it determines to be consistent with the goals of our executive compensation program even if the awards are not deductible by the Company for tax purposes.

In December 2017, the exemption from IRC Section 162(m)’s deduction limitation for performance-based compensation was repealed, effective for taxable years beginning after December 31, 2017. Under the legislation repealing Section 162(m), compensation paid to certain executive officers, including the NEOs, in excess of  $1 million will no longer be deductible unless it qualifies for certain transition relief applicable to certain arrangements in place as of November 2, 2017. Because of ambiguities and uncertainties as to the application and interpretation of Section 162(m) after the legislative change, no assurance can be given that any compensation originally intended to satisfy the requirements for exemption from Section 162(m) will, in fact, be fully deductible.

Trading Policies

Our insider trading policy prohibits all employees and directors from trading Company stock while in possession of material, non-publicly disclosed information. This policy requires executives and directors, as well as employees with regular access to insider information, to follow specific pre-clearance procedures before entering into transactions in our stock. Our policy prohibits hedging transactions related to our stock or pledging our stock, including any stock the executive or director may hold in excess of his or her stock ownership guideline requirements.

Independent Compensation Consultant

The primary role of the independent executive compensation consultant retained by the Compensation Committee is to advise the Compensation Committee on:

•

our compensation programs and processes relative to external corporate governance standards;

​

2018 PROXY STATEMENT   41​

COMPENSATION DISCUSSION AND ANALYSIS

•

the appropriateness of our executive compensation programs in comparison to those of our peers; and,

​

•

the effectiveness of the compensation programs in accomplishing the objectives set by the Compensation Committee with respect to executives.

​

In 2017, the Compensation Committee retained Mercer as its independent executive compensation consultant. The Compensation Committee evaluated whether Mercer’s work raised any conflict of interest and determined that no such conflict existed. During 2017, fees paid to Mercer in its role as the independent compensation consultant for the Compensation Committee totaled $172,955. In addition, the Company paid fees to Mercer totaling $1,034,452 during 2017 for all other services performed for the Company. These services can be broken down as 13 percent related to administration of pension liabilities in international locations that have been sold, 29 percent related to administration of ongoing international benefit plans, 14 percent related to Human Resources consulting engagements, and 44 percent related to surety bonds.

Compensation Risk Assessment

The Compensation Committee oversees management’s risk assessment of all elements of our compensation programs, policies and practices for all employees. Management has concluded that our compensation programs, policies and practices are not reasonably likely to have a material adverse effect on the Company. Relevant provisions of our programs include, but are not limited to:

•

VCIP and LTI metrics are aligned with our corporate strategy to ensure continued focus on actions that drive shareholder value.

​

•

VCIP and LTI compensation targets increase with each pay grade, emphasizing shareholder value creation over time.

​

•

Maximum payouts under VCIP and PSP programs are appropriately limited to balance risk-taking with long-term strategic goals.

​

•

Maintaining a level of discretion in the performance-based programs, which enables the Compensation Committee to award zero payouts to executives who perform poorly or when warranted by company performance.

​

•

Clawback provisions that allow for reduction in awards for executives who expose the Company to undue risk.

​

•

LTI design that provides incentives for executive retention and Company and individual performance.

​

•

Stock ownership guidelines that align executive interests with those of shareholders.

​

The Compensation Committee considers senior management succession planning a core part of the Company’s risk management program. At least annually, the Compensation Committee reviews with the CEO succession planning for senior leadership positions (other than the CEO position itself, for which succession planning is reviewed by the Nominating Committee), and the timing and development required to ensure continuity of leadership over the short- and long-terms, to manage risk in this area.

ROLE OF THE HUMAN RESOURCES AND COMPENSATION COMMITTEE

Authority and Responsibilities

The Compensation Committee is responsible for providing independent, objective oversight of our executive compensation programs and determining the compensation for our CEO and anyone who meets our definition of a Senior Officer. Currently, our internal guidelines define a Senior Officer as an officer of the Company who reports directly to the CEO or any other officer of the Company who is either a Senior Vice President or above or a reporting officer under Section 16(b) of the Exchange Act. As of December 31, 2017, we had 11 Senior Officers. The compensation tables that follow provide information about our CEO and certain of our Senior Officers. In addition, the Compensation Committee acts as plan administrator of the compensation programs and benefit plans for our CEO and Senior Officers and as an avenue of appeal for current and former Senior Officers regarding disputes over compensation and benefits.

42   2018 PROXY STATEMENT

COMPENSATION DISCUSSION AND ANALYSIS​

The Compensation Committee oversees the Company’s executive compensation philosophy, policies, plans and programs for our CEO and Senior Officers to ensure:

•

alignment of our executive compensation programs with the long-term economic interests of shareholders;

​

•

competitiveness of compensation within the markets in which Phillips 66 competes for talent;

​

•

retention of top talent; and,

​

•

development of a diverse talent pool with respect to CEO and Senior Officer succession planning.

​

One of the Compensation Committee’s responsibilities is to assist the Board in its oversight of the integrity of the Company’s COMPENSATION DISCUSSION AND ANALYSIS. The HUMAN RESOURCES AND COMPENSATION COMMITTEE REPORT summarizes certain Compensation Committee activities concerning compensation earned during 2017 by our NEOs.

A complete listing of the authority and responsibilities of the Compensation Committee is set forth in its written charter adopted by the Board of Directors, which is available in the “Investors” section of our website under the caption “Corporate Governance.”

Members

The Compensation Committee consists of four members who meet all requirements for “non-employee,” “independent” and “outside” director status under the Exchange Act, NYSE listing standards, and the IRC, respectively. The members of the Compensation Committee and the member to be designated as Chair, like the members and Chairs of all the Board committees, are reviewed annually by the Nominating Committee, which recommends committee appointments to the full Board. The Board of Directors has final approval of the committee structure of the Board.

Meetings

The Compensation Committee holds regularly scheduled meetings in association with regular Board meetings and meets by teleconference between such meetings as necessary to discharge its duties. The Compensation Committee reserves time at each regularly scheduled meeting to review matters in executive session without management present except as specifically requested by the Compensation Committee. In 2017, the Compensation Committee had five regularly scheduled meetings and one additional telephonic meeting. More information regarding the Compensation Committee’s activities at such meetings can be found in the COMPENSATION DISCUSSION AND ANALYSIS.

Continuous Improvement

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

•

receives ongoing training regarding best practices for executive compensation;

​

•

aided by the Company’s management, the Compensation Committee’s independent compensation consultant, and, when deemed appropriate, independent legal counsel, regularly reviews its responsibilities and governance practices in light of ongoing changes in the legal and regulatory arena and trends in corporate governance;

​

•

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

​

•

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

​

•

regularly reviews and assesses whether the Company’s executive compensation programs are having the desired effects without encouraging an inappropriate level of risk; and

​

•

regularly reviews all its activities, including its self-assessment and a compensation risk assessment, with the full Board of Directors.

​

2018 PROXY STATEMENT   43​

COMPENSATION DISCUSSION AND ANALYSIS

HUMAN RESOURCES AND COMPENSATION COMMITTEE REPORT

Review with Management.   The Compensation Committee has reviewed and discussed with management the COMPENSATION DISCUSSION AND ANALYSIS presented in this proxy statement.

Discussions with Independent Executive Compensation Consultant.   The Compensation Committee has discussed with Mercer, an independent executive compensation consulting firm, the executive compensation programs of the Company, as well as specific compensation decisions made by the Compensation Committee for 2017. Mercer was retained directly by the Compensation Committee, independent of the management of the Company. The Compensation Committee has received written disclosure from Mercer confirming the consultant’s independence, has discussed with Mercer its independence from Phillips 66, and believes Mercer to be independent of management.

Recommendation to the Phillips 66 Board of Directors.   Based on its review and discussions noted above, the Compensation Committee recommended to the Board of Directors that the COMPENSATION DISCUSSION AND ANALYSIS be included in the Phillips 66 proxy statement on Schedule 14A and the Phillips 66 Annual Report on Form 10-K for the year ended December 31, 2017.

HUMAN RESOURCES AND COMPENSATION COMMITTEE

Dr. Marna C. Whittington, Chairperson
Gary K. Adams
Harold W. McGraw III
Glenn F. Tilton

44   2018 PROXY STATEMENT

The following tables and accompanying narrative disclosures provide information concerning total compensation earned by our CEO and other NEOs as of December 31, 2017 for services to Phillips 66 or any of our subsidiaries during 2017, 2016 and 2015.

SUMMARY COMPENSATION TABLE

The following table summarizes the compensation for our NEOs for fiscal years 2017, 2016 and 2015.

(1)

Includes any amounts that were voluntarily deferred under our KEDCP.

​

(2)

Because our annual bonus program (VCIP) has performance measures that must be achieved before any payout can be made to our NEOs, VCIP payments are shown in the Non-Equity Incentive Plan Compensation column of the table rather than the Bonus column.

​

(3)

Amounts shown represent the aggregate grant date fair value of RSU and PSP awards determined in accordance with U.S. GAAP. Assumptions used in calculating these amounts are included in Note 20—Employee Benefit Plans in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017 (our “2017 Form 10-K”).

​

The PSP target award included in 2015 has a performance period that ended in 2017. The PSP target award included in 2016 has a performance period that ends in 2018. The PSP target award included in 2017 has a performance period that ends in 2019.

Amounts shown relating to PSP are targets because target is the probable outcome for the applicable performance period, consistent with the accounting treatment under GAAP. If the maximum payout were used for the PSP awards the amounts shown relating to PSP would double, although the value of the actual payout would depend on the stock price at the time of the payout. If the minimum payout were used, the amounts for PSP awards would be reduced to zero. Actual payouts with regard to the targets set for the performance period that ended in 2017 were approved by the Compensation Committee at its February 2018 meeting. Those payouts were as follows (with values shown at fair market value on the date of payout): Mr. Garland, $9,970,589; Mr. Herman, $1,753,361; Ms. Johnson, $2,119,314; Mr. Mitchell, $1,472,189; and Mr. Taylor, $4,087,219.

Earned payouts under the PSP 2015-2017 have been, and under the PSP 2016-2018 and PSP 2017-2019 are expected to be, made in cash at the end of the applicable performance period and will be forfeited if the NEO is terminated prior to the end of the performance period (other than for death or following disability or after a change in control). If the NEO retires after age 55 and with five years of service, the NEO is entitled to a prorated award for any ongoing program in which he or she participated for at least 12 months.

(4)

Amounts shown represent the aggregate grant date fair value of awards determined in accordance with GAAP. Assumptions used in calculating these amounts are included in Note 20—Employee Benefit Plans in the Notes to Consolidated Financial Statements in our 2017 Form 10-K.

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(5)

These are amounts paid under our annual bonus program (VCIP), including bonus amounts that were voluntarily deferred under our KEDCP. See note (2) above. These amounts were paid in February 2018, following the performance year.

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(6)

Reflects the actuarial increase in the present value of the benefits under our pension plans determined using interest rate and mortality rate assumptions consistent with those used in our financial statements. There are no deferred compensation earnings reported in this column, as our nonqualified deferred compensation plans do not provide above-market or preferential earnings.

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2018 PROXY STATEMENT   45​

EXECUTIVE COMPENSATION TABLES

(7)

We offer limited perquisites to our NEOs, which, together with Company contributions to our qualified savings and nonqualified defined contribution plans, are reflected in the All Other Compensation column as summarized below:

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(a)

Under the terms of our nonqualified defined contribution plans, we make contributions to the accounts of all eligible employees, including the NEOs. See the NONQUALIFIED DEFERRED COMPENSATION table and accompanying narrative and notes for more information.

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(b)

We maintain life insurance policies and/or death benefits for all our U.S.-based salaried employees (at no cost to the employee) with a face value approximately equal to the employee’s annual salary. We maintain group life insurance policies on each of our NEOs equal to approximately two times his or her annual salary. The amounts shown are for premiums paid by us to provide the additional group life insurance above what is provided to the broad-based employees.

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(c)

Costs associated with executive physicals.

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(d)

Costs associated with financial counseling and estate planning services with approved provider.

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(e)

Under the terms of our tax-qualified defined contribution plans, we make contributions to the accounts of all eligible employees, including the NEOs.

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(f)

We maintain a Matching Gift Program under which certain gifts by employees to qualified educational or charitable institutions are matched by the Company. The program matches up to $15,000 annually. The amounts shown reflect the actual payments made by us in 2017, which due to processing delays can include contributions in 2016 that were matched by the Company in 2017 and are therefore reported in this proxy statement.

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(g)

The amounts shown primarily reflect payments by us relating to certain taxes incurred by the NEOs. Mr. Herman received tax assistance after he exercised stock options that he had been granted while an expatriate employee prior to becoming an NEO ($1,493,411). All expatriate employees receive this tax assistance. We also provide tax assistance when we request family members or other guests to accompany an NEO to a Company function and, as a result, the NEO is deemed to make personal use of Company assets such as Company aircraft and thereby incurs imputed income. We believe this type of expense is appropriately characterized as a business expense and, if the NEO incurs imputed income in accordance with applicable tax laws, we will generally reimburse the NEO for any increased tax costs (Mr. Garland $20,714; Mr. Herman $8,491; Ms. Johnson $8,274; Mr. Mitchell $11,914; and Mr. Taylor $9,075). We also provide tax assistance on miscellaneous gifts (such as duffel bags, jackets, and ornaments received as a member of the Board or the Executive Leadership Team), occasional car and driver for personal use, and companion travel expenses. The total cost of these benefits and their tax assistance are as follows: Mr. Garland $1,188; Mr. Herman $457; Ms. Johnson $442; Mr. Mitchell $472; and Mr. Taylor $546.

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Also included are miscellaneous benefits. This includes benefits required for employees covered under our Comprehensive Security Program, which includes Mr. Garland and Mr. Taylor. These benefits include the use of a car and driver when security deems it required and home security fees that are in excess of the cost of a system typical for homes in their neighborhood (Mr. Garland $431; Mr. Taylor $26,141).

(h)

The Phillips 66 Comprehensive Security Program requires in certain circumstances that Mr. Garland and Mr. Taylor fly on Company aircraft. The amount presented above represents the approximate incremental cost to Phillips 66 for personal use of the aircraft. Approximate incremental cost has been determined by calculating the variable costs for each aircraft during the year, dividing that amount by the total number of miles flown by that aircraft, and multiplying the result by the miles flown for personal use during the year. Incremental costs for flights to the hangar or other locations without passengers, commonly referred to as “deadhead” flights, are included in the calculation.

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46   2018 PROXY STATEMENT

EXECUTIVE COMPENSATION TABLES​

GRANTS OF PLAN-BASED AWARDS

The following table provides additional information about plan-based compensation disclosed in the SUMMARY COMPENSATION TABLE. This table includes both equity and non-equity awards.