UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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2012 Proxy Statement
THE VALUE OF PERFORMANCE.
NORTHROP GRUMMAN
April 6, 2012
On behalf of the Board of Directors and management team, we cordially invite you to attend Northrop Grumman Corporations 2012 Annual Meeting of Shareholders. This years meeting will be held Wednesday, May 16, 2012 at our principal executive office located at 2980 Fairview Park Drive, Falls Church, Virginia, 22042 beginning at 8:00 a.m. Eastern Daylight Time.
We look forward to meeting those of you who are able to attend the meeting, which will be our first annual meeting held in our new corporate headquarters. For those who are unable to attend, live coverage of the meeting will be available on the Northrop Grumman Web site at www.northropgrumman.com.
At this meeting, shareholders will vote on matters set forth in the accompanying Notice of Annual Meeting and Proxy Statement. We will also provide a report on our Company and will entertain questions of general interest to the shareholders.
Your vote is important. Your proxy or voting instruction card includes specific information regarding the several ways to vote your shares. We encourage you to vote as soon as possible, even if you plan to attend the meeting. You may vote over the internet, by telephone or by mailing a proxy or voting instruction card.
Thank you for your continued interest in Northrop Grumman Corporation.
Wes Bush
Chairman, Chief Executive Officer and President
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
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The Annual Meeting of Shareholders of Northrop Grumman Corporation will be held on Wednesday, May 16, 2012 at 8:00 a.m. Eastern Daylight Time at our principal executive office located at 2980 Fairview Park Drive, Falls Church, Virginia 22042.
Shareholders of record at the close of business on March 20, 2012 are entitled to vote at the Annual Meeting. The following items are on the agenda:
(1) | The election of the thirteen nominees named in the attached Proxy Statement as directors to hold office until the 2013 Annual Meeting of Shareholders; |
(2) | A proposal to approve, on an advisory basis, the compensation of our named executive officers; |
(3) | A proposal to ratify the appointment of Deloitte & Touche LLP as our independent auditor for the year ending December 31, 2012; |
(4) | A proposal to approve an amendment to the Certificate of Incorporation of Titan II, Inc. (now a wholly-owned subsidiary of Huntington Ingalls, Inc.), to eliminate the provision requiring our shareholders to approve certain actions by or involving Titan II, Inc.; |
(5) | A proposal to approve an amendment and restatement of our Certificate of Incorporation to provide additional rights for holders of the Companys common stock to act by written consent subject to various provisions; |
(6) | One shareholder proposal included and discussed in the accompanying Proxy Statement; and |
(7) | Other business as may properly come before the Annual Meeting or any adjournment or postponement thereof. |
All shareholders are invited to attend the Annual Meeting. To be admitted you will need a form of photo identification. If your broker holds your shares in street name, you will also need proof of beneficial ownership of Northrop Grumman common stock.
By order of the Board of Directors,
Jennifer C. McGarey
Corporate Vice President and Secretary
2980 Fairview Park Drive
Falls Church, Virginia 22042
April 6, 2012
IMPORTANT
Important Notice Regarding the Availability of Proxy Materials for the Shareholders Meeting to be held on May 16, 2012:
The Proxy Statement for the 2012 Annual Meeting of Shareholders and the Annual Report for the year ended December 31, 2011 are available at: www.edocumentview.com/noc.
You may submit a proxy by telephone or over the internet. For instructions on submitting an electronic proxy please see the section entitled Questions and Answers About the Annual Meeting in this Proxy Statement or the proxy card.
If you receive a proxy card, please sign, date and return the proxy card for which a return envelope is provided. No postage is required if mailed in the United States.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l
SUMMARY INFORMATION
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This summary provides Business, Compensation and Corporate Governance Highlights from our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (our 2011 Form 10-K) as filed with the SEC on February 8, 2012 and elsewhere in this Proxy Statement and is provided to assist you in reviewing the Companys 2011 performance. The information contained below is only a summary. For additional information about these topics, please refer to the more fulsome discussions contained in this Proxy Statement and in our 2011 Form 10-K.
BUSINESS HIGHLIGHTS
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Our strong 2011 financial results demonstrate our progress in achieving superior operating performance and our effective cash deployment. We achieved higher operating income, earnings and cash flow in a challenging federal budget environment, while continuing to align our portfolio with our customers emphasis on affordability and in markets such as Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR), unmanned systems, cybersecurity and logistics. Our 2011 results continue a record of improving performance aimed at value creation for our shareholders, customers and employees.
Portfolio Highlights In March 2011, we completed the spin-off of our former shipbuilding business. In the spin-off, our shareholders received shares of the new shipbuilding company, Huntington Ingalls Industries, Inc. (HII), which represented equity value of $1.8 billion at the time of the spin-off. We also refined our portfolio by divesting or de-emphasizing certain non-core and underperforming businesses. These actions improved our financial performance and sharpened our focus on four core areas C4ISR, manned and unmanned systems, cybersecurity and logistics.
Performance Highlights 2011 earnings from continuing operations increased 10% to $2.1 billion from $1.9 billion in 2010. Earnings per share from continuing operations increased 17% to $7.41 from $6.32. This increase resulted from improved performance from our businesses, more favorable pension expense, lower interest expense and fewer shares outstanding as a result of our substantial share repurchases. These positive trends more than offset lower sales and higher taxes in 2011. Segment operating income generated by our businesses rose during the year and as a percentage of sales increased to 11.6%. Total operating income increased 16% and as a percent of sales increased to 12.4%.
We also generated higher cash from operations and higher free cash flow in 2011.* Cash provided by operations before our discretionary after-tax pension contributions (CPO) totaled approximately $3 billion, and free cash flow before discretionary after-tax pension contributions (FCF) totaled $2.5 billion.*
Cash Deployment Our strong cash generation in 2011 and the $1.4 billion cash contribution from the HII spin-off allowed us to repurchase 40.2 million shares for $2.3 billion. We also raised our quarterly dividend 6.4% to an annualized rate of $2.00 per share, our eighth consecutive annual dividend increase. Cash returned to shareholders through dividends and share repurchases totaled $2.8 billion in 2011.
* | Cash from operations and free cash flow presented are before discretionary after-tax pension contributions of $648 million in 2011 and $539 million in 2010. The information presented is a non-GAAP metric. For more information, see Miscellaneous Use of Non-GAAP Financial Measures on page 71 of this Proxy Statement. |
l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
SUMMARY INFORMATION (continued)
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2011 COMPENSATION HIGHLIGHTS
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¡ | The compensation earned in 2011 by our Chief Executive Officer (CEO) and the other named executive officers (NEOs), as described in the Compensation Discussion and Analysis section of this Proxy Statement, reflect our Companys strong financial performance, achievement of the performance targets established by the Compensation Committee of the Board of Directors, and continued progress toward exceeding peer average financial benchmarks. |
¡ | Consistent with our compensation philosophy, more than 90% of our CEOs 2011 compensation and more than 80% of the other NEOs 2011 compensation was incentive-based pay. 2011 compensation earned also included special incentive grants awarded in February 2011 to certain NEOs designed to promote managements long-term focus on financial and operational performance. |
CEO Total Direct Compensation
2011 Base |
2011 Annual |
2011 Long-Term |
2011 Total
Direct |
% Incentive- |
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Wesley G. Bush |
$ | 1,471,251 | $ | 4,027,500 | $ | 12,977,692 | $ | 18,476,443 | 92 | % | ||||||||||
James F. Palmer |
$ | 845,258 | $ | 1,250,000 | $ | 3,244,427 | $ | 5,339,685 | 84 | % | ||||||||||
Gary W. Ervin |
$ | 845,257 | $ | 1,250,000 | $ | 4,522,894 | $ | 6,618,151 | 87 | % | ||||||||||
James F. Pitts |
$ | 845,258 | $ | 1,200,000 | $ | 3,244,427 | $ | 5,289,685 | 84 | % | ||||||||||
Linda A. Mills |
$ | 770,233 | $ | 1,150,000 | $ | 2,919,965 | $ | 4,840,198 | 84 | % |
* | Represents the total value of option awards and stock awards granted in 2011. |
** | Percentage of Incentive-based pay represents the sum of actual annual incentive and long-term incentive grant value as a percentage of total direct compensation earned during the year. |
CORPORATE GOVERNANCE HIGHLIGHTS
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We are committed to good corporate governance, including maintaining and facilitating open lines of communication with our shareholders. Corporate governance highlights include:
¡ | Ability of Shareholders to Act by Written Consent Our Board of Directors carefully considered the input of shareholders at last years annual meeting and has submitted to shareholders for approval a proposed amendment to our Certificate of Incorporation that will permit greater shareholder action by written consent. We believe this change represents a meaningful additional right for our shareholders. |
¡ | Say-on-Pay Advisory Vote We were pleased that last years shareholders vote supported the compensation of our named executive officers. In response to last years say-on-frequency advisory vote, we will submit to shareholders a non-binding say-on-pay resolution on our executive compensation again this year, and on an annual basis. |
¡ | Political Contributions As a result of last years shareholder proposal and other shareholder input aimed at increasing transparency with resect to our political activities, we undertook a comprehensive review of our political contribution activity. After this review, we have significantly enhanced our disclosure on our website regarding political contributions made by the Company and by our employees political action committee. |
¡ | Director Stock Ownership To encourage directors further to have a direct and material investment in our common stock, we implemented director stock ownership requirements that require each director ultimately to own stock of the Company in an amount equal to five times their annual cash retainer. |
¡ | Election of Additional Independent Directors We increased the Board size to thirteen directors, twelve of whom are independent, and we appointed two additional independent directors to the Board. |
¡ | Shareholder Outreach We have expanded our shareholder engagement program to foster increased communication with our shareholders and redesigned this Proxy Statement in an effort to provide more understandable and easily accessible disclosure for our shareholders. |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l
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l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 1
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING (continued)
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How many votes are needed to approve each proposal?
The following table summarizes the vote required for approval of each proposal and the effect of abstentions and broker non-votes:
Proposal | Vote Required | Abstentions | Broker Non-Votes |
Unmarked Proxy Cards | ||||
Election of Directors (Proposal One) |
Majority of votes cast | No effect | No effect | Voted FOR | ||||
Advisory Vote on Compensation of Named Executive Officers (Proposal Two) |
Majority of votes cast | No effect | No effect | Voted FOR | ||||
Ratification of Appointment of Deloitte & Touche LLP (Proposal Three) |
Majority of votes cast | No effect | No effect | Voted FOR | ||||
Amendment of Titan II, Inc. Certificate of Incorporation (Proposal Four) |
Majority of outstanding shares | Treated as votes AGAINST |
Treated as votes AGAINST |
Voted FOR | ||||
Amendment and Restatement of Northrop Grumman Corporation Certificate of Incorporation to Provide Additional Rights for Shareholder Action by Written Consent (Proposal Five) |
Majority of outstanding shares | Treated as votes AGAINST |
Treated as votes AGAINST |
Voted FOR | ||||
Shareholder Proposal Independent Board Chairperson (Proposal Six) |
Majority of votes cast | No effect | No effect | Voted AGAINST |
2 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING (continued)
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 3
ELECTION OF DIRECTORS
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WESLEY G. BUSH, 51 Chairman, Chief Executive Officer and President, Northrop Grumman Corporation.
Director since 2009
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Mr. Wesley G. Bush was elected Chief Executive Officer and President of the Company effective January 1, 2010 and Chairman of the Board of Directors effective July 19, 2011. He has served on the Board of Directors since September 2009. Mr. Bush served as President and Chief Operating Officer from March 2007 through December 2009, as President and Chief Financial Officer from May 2006 through March 2007, and as Corporate Vice President and Chief Financial Officer from March 2005 to May 2006. Following the acquisition of TRW by the Company, he was named Corporate Vice President and President of the Space Technology sector. Mr. Bush joined TRW in 1987 and during his career with that company held various leadership positions including President and CEO of TRW Aeronautical Systems. He is a director of Norfolk Southern Corporation. Mr. Bush is Vice Chairman of the Aerospace Industries Association and also serves on the boards of several non-profit organizations, including the Smithsonian National Air and Space Museum, Conservation International and the Business-Higher Education Forum. He also serves on the National Infrastructure Advisory Council.
Key Attributes, Skills and Qualifications
Mr. Bush has 29 years of experience in the aerospace and defense industry which have included a broad array of management positions. He has held a number of key positions within our Company including Chief Financial Officer, Chief Operating Officer and currently Chairman, CEO and President. Mr. Bush has extensive international business experience. His service on the boards of non-profit organizations which focus on issues involving homeland security, conservation and higher education in science, technology, engineering and mathematics enhance the knowledge of the Board of Directors in these key areas. Mr. Bush is the only member of management who serves on the Board of Directors.
4 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
PROPOSAL ONE: ELECTION OF DIRECTORS (continued)
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LEWIS W. COLEMAN, 70 Lead Independent Director of the Board of Directors, Northrop Grumman Corporation. President and Chief Financial Officer, DreamWorks Animation SKG, a film animation studio.
Director since 2001
Member of the Compensation Committee and Governance Committee
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Mr. Lewis W. Coleman has been the President of DreamWorks Animation since December 2005 and Chief Financial Officer since March 2007. He has been a director of DreamWorks Animation since 2006. Previously he was the President of the Gordon and Betty Moore Foundation from its founding in 2000 to 2004. Prior to that, Mr. Coleman was employed by Banc of America Securities, formerly known as Montgomery Securities where he was a Senior Managing Director from 1995 to 1998 and Chairman from 1998 to 2000. Before he joined Montgomery Securities, Mr. Coleman was Chairman of Banc of America Securities L.L.C., a subsidiary of Bank of America Corporation in San Francisco, and also served as Vice Chairman of the Board of Directors and Chief Financial Officer for Bank of America and Bankamerica Corp. Before that, Mr. Coleman was head of the World Banking Group, assuming that position after serving as head of capital markets, where he was responsible for all global trading and underwriting activity. He joined the bank in 1986 as Chief Credit Officer for the group. Mr. Coleman spent the previous thirteen years at Wells Fargo Bank where his positions included Head of International Banking, Chief Personnel Officer and Chairman of the Credit Policy Committee. Mr. Coleman previously served as a director of Chiron Corporation and Regal Entertainment.
Key Attributes, Skills and Qualifications
Mr. Coleman brings extensive banking and financial experience and has demonstrated his board leadership skills as both our Non-executive Chairman of the Board and our Lead Independent Director. He is also active in several non-profit organizations, which allows him to bring a broad perspective to our Board of Directors on a number of non-financial issues. These non-profit organizations include several environmental groups and The National Academies Board on Science, Technology and Economic Policy, which focuses on issues of trade, tax, human resources, research and development and statistical policy.
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VICTOR H. FAZIO, 69 Senior Advisor, Akin Gump Strauss Hauer & Feld LLP, a law firm.
Director since 2000
Member of the Audit Committee and Governance Committee (Chair)
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Mr. Victor H. Fazio was named Senior Advisor at Akin Gump Strauss Hauer & Feld LLP in May 2005 after serving as senior partner at Clark & Weinstock since 1999. Prior to that, Mr. Fazio was a Member of Congress for 20 years representing Californias third congressional district. During that time he served as a member of the Armed Services, Budget and Ethics Committees and was a member of the House Appropriations Committee where he served as Subcommittee Chair or ranking member for 18 years. Mr. Fazio was a member of the elected leadership in the House from 1989 to 1998 including four years as Chair of his Partys Caucus, the third ranking position. From 1975 to 1978, Mr. Fazio served in the California Assembly and was a member of the staff of the California Assembly Speaker from 1971 to 1975. He is a member of the board of directors of various private companies and non-profit organizations including the Ice Energy Corporation, Peyton Street Independent Financial Services Corporation, Energy Future Coalition, the Campaign Finance Institute, the Committee for a Responsible Federal Budget, Center for Strategic Budgetary Assessments, The Information Technology and Innovation Foundation, UC Davis Medical School Advisory Board, UC Davis Foundation and the National Parks Conservation Association.
Key Attributes, Skills and Qualifications
Mr. Fazios service in Congress brings to our Board of Directors expertise in budgeting, appropriations and national security. He also has public policy experience from running for and serving in public office. As a Senior Advisor for Akin Gump Strauss Hauer & Feld LLP, he has represented clients on a wide variety of public policy matters. His extensive prior board experience with the American Stock Exchange and our Board of Directors, as well as his service as Chair of the Governance Committee, gives him broad-based corporate governance expertise and a deep knowledge of our governance culture and history.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 5
PROPOSAL ONE: ELECTION OF DIRECTORS (continued)
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DONALD E. FELSINGER, 64 Executive Chairman, Sempra Energy, an energy services holding company.
Director since 2007
Member of the Compensation Committee (Chair) and Governance Committee |
Mr. Donald E. Felsinger is Executive Chairman of the Board of Directors of Sempra Energy, a position he has held since July 2011. From February 2006 through June 2011, he was Chairman and CEO of Sempra Energy. Prior to that, Mr. Felsinger was President and Chief Operating Officer of Sempra Energy from January 2005 to February 2006 and a member of the Board of Directors, and from 1998 through 2004, he was Group President and Chief Executive Officer of Sempra Global. Prior to the merger that formed Sempra Energy he served as President and Chief Operating Officer of Enova Corporation, the parent company of San Diego Gas & Electric (SDG&E). Prior positions included President and Chief Executive Officer of SDG&E, Executive Vice President of Enova Corporation and Executive Vice President of SDG&E. Mr. Felsinger serves on the board of Archer Daniels Midland and is a member of The Conference Board, the Committee Encouraging Corporate Philanthropy and the USA/Mexico Chamber of Commerce.
Key Attributes, Skills and Qualifications
Mr. Felsinger brings extensive experience to our Board of Directors having served as a board member, Chairman and Chief Executive Officer of other Fortune 500 companies. He provides our Board of Directors with his expertise, acquired through leadership roles at Sempra Energy and other energy companies, in mergers and acquisitions, environmental matters, corporate governance, strategic planning, engineering, finance, human resources, compliance, risk management, international business and public affairs. Mr. Felsinger possesses an in-depth knowledge of executive compensation and benefits practices and serves as Chair of the Compensation Committee.
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STEPHEN E. FRANK, 70 Retired Chairman, President and Chief Executive Officer, Southern California Edison, an electric utility company.
Director since 2005
Member of the Audit Committee (Chair) and Governance Committee
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Mr. Stephen E. Frank served as Chairman, President and Chief Executive Officer of Southern California Edison from 1995 until his retirement in January 2002. During this time, he served on the boards of directors of that company and its parent company, Edison International. Prior to joining Southern California Edison in 1995, Mr. Frank was President and Chief Operating Officer of Florida Power and Light Company and was a director of FPL Group, its parent company. He also has served as Executive Vice President and Chief Financial Officer of TRW Inc., as well as Vice President, Controller, and Treasurer of GTE Corporation. His earlier career included financial and sales management positions with U.S. Steel Corporation. Mr. Frank serves on the board of directors of Washington Mutual, Inc., NV Energy Inc., and AEGIS Insurance Services Limited. He served on the board of Intermec, Inc., Puget Energy, Inc. and LNR Property Corporation during the past five years. He also serves as a board member of the Los Angeles Philharmonic Association, the Reno Philharmonic Association and St. Marys Health Foundation.
Key Attributes, Skills and Qualifications
Mr. Frank possesses extensive experience as an executive officer and director of several public companies and brings to our Board of Directors a strong background in finance and operating management in a variety of diversified industries and organizations. He has served in such senior leadership positions as Chairman, Chief Executive Officer, President, Chief Financial Officer and Controller. Mr. Frank holds an MBA in Finance from the University of Michigan and completed the Advanced Management Program at Harvard Business School. Mr. Frank is an audit committee financial expert as defined by the rules and regulations of the SEC and serves as Chair of the Audit Committee.
6 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
PROPOSAL ONE: ELECTION OF DIRECTORS (continued)
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BRUCE S. GORDON, 66 Former President & CEO, NAACP and Retired President, Retail Markets Group, Verizon Communications Inc., a telecommunications company.
Director since 2008
Member of the Compensation Committee and Policy Committee
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Mr. Bruce S. Gordon served as President and Chief Executive Officer of the National Association for the Advancement of Colored People from June 2005 to March 2007. In 2003, Mr. Gordon retired from Verizon Communications Inc., where he had served as President, Retail Markets Group since 2000. Prior to that, Mr. Gordon served as Group President of the Enterprise Business Unit, President of Consumer Services, Vice President of Marketing and Sales and Vice President of Sales for Bell Atlantic Corporation (Verizons predecessor). He is a trustee of the U.S. Fund for UNICEF, a member of the Board of Directors of the National Underground Railroad Freedom Center and the Newport Festival Foundation and a member of the Executive Leadership Council. Mr. Gordon is a director of Tyco International Ltd. and CBS Corporation. He currently serves as a diversity consultant to Fortune 500 companies.
Key Attributes, Skills and Qualifications
Mr. Gordon brings business leadership skills to our Board of Directors acquired from his experience with corporate and non-profit enterprises. Mr. Gordon possesses strong skills in marketing and human resources. He has led diversity efforts and gained a reputation as a leader and consensus builder. In addition, his service on boards of other large public companies provides our Board of Directors with insight into large company governance best practices.
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MADELEINE A. KLEINER, 60 Former Executive Vice President and General Counsel, Hilton Hotels Corporation, a hotel and resort company.
Director since 2008
Member of the Audit Committee and Governance Committee
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Ms. Madeleine A. Kleiner served as Executive Vice President, General Counsel and Corporate Secretary for Hilton Hotels Corporation from January 2001 until February 2008 when she completed her responsibilities in connection with the sale of the company. From 1999 through 2001, she served as a director of a number of Merrill Lynch mutual funds operating under the Hotchkiss and Wiley name. Ms. Kleiner served as Senior Executive Vice President, Chief Administrative Officer and General Counsel of H.F. Ahmanson & Company and its subsidiary, Home Savings of America, until the company was acquired in 1998, and prior to that was a partner at the law firm of Gibson, Dunn and Crutcher where she advised corporations and their boards primarily in the areas of mergers and acquisitions, corporate governance and securities transactions and compliance. Ms. Kleiner currently serves on the board of directors of Jack in the Box Inc. Ms. Kleiner is a member of the UCLA Medical Center Board of Advisors and a member of the board of the New Village Charter School.
Key Attributes, Skills and Qualifications
Ms. Kleiner brings to our Board of Directors expertise in corporate governance, implementation of Sarbanes-Oxley controls, risk management, securities transactions, mergers and acquisitions, human resources, government relations and crisis management acquired through her experience as general counsel overseeing the corporate secretarial function for two public companies, as outside counsel to numerous public companies and through service on another public company board. She also is an audit committee financial expert as defined by SEC rules. Ms. Kleiners training as a lawyer combined with the experience of being a member of executive management of a number of companies makes her a resource for our Board of Directors in its analysis of a variety of business issues.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 7
PROPOSAL ONE: ELECTION OF DIRECTORS (continued)
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KARL J. KRAPEK, 63 Retired President and Chief Operating Officer, United Technologies Corporation, an aerospace and building systems company.
Director since 2008
Member of the Compensation Committee and Policy Committee
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Mr. Karl J. Krapek retired as President and Chief Operating Officer of United Technologies Corporation in January 2002. At United Technologies Corporation, he served for 20 years in various management positions, including Executive Vice President and director in 1997; President and Chief Executive Officer of Pratt & Whitney in 1992; Chairman, President and Chief Executive Officer of Carrier Corporation in 1990; and President of Otis Elevator Company in 1989. Prior to joining United Technologies Corporation, he was Manager of Car Assembly Operations for the Pontiac Motor Car Division of General Motors Corporation. In 2002, Mr. Krapek became a co-founder of The Keystone Companies, which develops residential and commercial real estate. He chairs the Strategic Planning Committee for the Board of Directors at St. Francis Care, Inc. Mr. Krapek is Lead Independent Director of The Connecticut Bank and Trust Company, a director of Prudential Financial, Inc. and a director of Visteon Corporation. He was a director of Delta Airlines Inc., Lucent Technologies and Alcatel Lucent during the past five years.
Key Attributes, Skills and Qualifications
Mr. Krapek brings industry experience, leadership skills and public company board experience to our Board of Directors. He has deep operational experience in aerospace and defense, domestic and international business operations and technology, and lean manufacturing and competitive excellence. Mr. Krapek also excels in strategic planning and performance improvement. He holds leadership positions at several non-profit charitable and educational organizations.
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RICHARD B. MYERS, 70 General, United States Air Force (Ret.) and Former Chairman of the Joint Chiefs of Staff.
Director since 2006
Member of the Policy Committee (Chair) and Compensation Committee
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General Richard B. Myers retired from his position as the fifteenth Chairman of the Joint Chiefs of Staff, the U.S. militarys highest ranking officer, in September 2005 after serving in that position for four years. In this capacity, he served as the principal military advisor to the President, the Secretary of Defense, and the National Security Council. Prior to becoming Chairman, he served as Vice Chairman of the Joint Chiefs of Staff from March 2000 to September 2001. As the Vice Chairman, General Myers served as the Chairman of the Joint Requirements Oversight Council, Vice Chairman of the Defense Acquisition Board, and as a member of the National Security Council Deputies Committee and the Nuclear Weapons Council. During his military career, General Myers commands included Commander in Chief, North American Aerospace Defense Command and U.S. Space Command; Commander, Air Force Space Command; Commander Pacific Air Forces; and Commander of U.S. Forces Japan and 5th Air Force at Yokota Air Base, Japan. General Myers is a director of Deere & Company, United Technologies Corporation, and Aon Corporation. He is Foundation Professor of Military History and Leadership at Kansas State University and occupies the Colin L. Powell Chair for National Security Ethics, Leadership and Character at the National Defense University.
Key Attributes, Skills and Qualifications
During his extensive career as a senior military officer and Chairman of the Joint Chiefs of Staff, General Myers has held leadership positions at the highest levels of the United States government and armed forces. He possesses a deep understanding of crisis management, and is a leading expert on national security and global geo-political issues. He has extensive experience with Department of Defense operational requirements and is able to provide our Board of Directors with advice on issues related to the intelligence community. General Myers is a recipient of the Presidential Medal of Freedom and serves on boards of several large public companies.
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PROPOSAL ONE: ELECTION OF DIRECTORS (continued)
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AULANA L. PETERS, 70 Retired Partner, Gibson, Dunn & Crutcher, a law firm.
Director since 1992
Member of the Audit Committee and Governance Committee
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Ms. Aulana L. Peters is a retired partner of the law firm of Gibson, Dunn & Crutcher where she was a partner from 1980 to 1984 and 1988 to 2000. From 1984 to 1988, she served as a Commissioner of the Securities and Exchange Commission. From 2001 to 2002, Ms. Peters served as a member of the Public Oversight Board of the American Institute of Certified Public Accountants. Ms. Peters has also served as a member of the Financial Accounting Standards Board Steering Committee for its Financial Reporting Project and as a member of the Public Oversight Boards Panel on Audit Effectiveness. Currently Ms. Peters serves on the U.S. Comptroller Generals Accountability Advisory Council, the International Public Interest Oversight Board, and the Board of Trustees, Mayo Clinic. Ms. Peters is a director of 3M Company and Deere & Company. She served on the board of Merrill Lynch & Co. during the past five years.
Key Attributes, Skills and Qualifications
Ms. Peters served as a Commissioner of the SEC and as a partner in a major law firm. She brings to our Board of Directors extensive public board experience, as well as public accounting and audit committee expertise. Ms. Peters memberships on the International Public Interest Oversight Board for Auditing and Professional Ethics and the U.S. Comptroller General Accountability Advisory Panel give our Board of Directors access to thought leadership in auditing, ethics and professional standards. Ms. Peters has authored numerous articles on corporate governance and Sarbanes-Oxley compliance and is an audit committee financial expert as defined by SEC rules.
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GARY ROUGHEAD, 60 Admiral, United States Navy (Ret.) and 29th Chief of Naval Operations.
Director since 2012
Member of the Audit Committee and Policy Committee
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Admiral Gary Roughead retired from his position as the 29th Chief of Naval Operations in September 2011, after serving in that position for four years. The Chief of Naval Operations is the senior military position in the United States Navy. As Chief of Naval Operations, Admiral Roughead stabilized and accelerated ship and aircraft procurement plans and the Navys capability and capacity in ballistic missile defense and unmanned air and underwater systems. He restructured the Navy to address the challenges and opportunities in cyber operations. Prior to becoming the Chief of Naval Operations, he held six operational commands (including commanding both the Atlantic and Pacific Fleets). Admiral Roughead is a Distinguished Fellow at the Hoover Institution. He is also a member of the Council on Foreign Relations and is a director of Project HOPE and a trustee of CNA, a not-for-profit research and analysis organization, and the Woods Hole Oceanographic Institution.
Key Attributes, Skills and Qualifications
Admiral Roughead has had an extensive career as a senior military officer with the United States Navy. He has held numerous operational commands, as well as leadership positions within the United States Navy. Admiral Roughead brings to our Board of Directors expertise in national security, information warfare and cyber operations. He also brings to the Board of Directors experience in leadership, crisis management and fiscal and procurement matters.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 9
PROPOSAL ONE: ELECTION OF DIRECTORS (continued)
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THOMAS M. SCHOEWE, 59 Former Executive Vice President and Chief Financial Officer, Wal-Mart Stores, Inc., an operator of retail stores.
Director since 2011
Member of the Audit Committee and Policy Committee |
Mr. Thomas M. Schoewe was Executive Vice President and Chief Financial Officer of Wal-Mart Stores Inc. from 2000 to 2010. Prior to his employment with Wal-Mart, he held several roles at the Black and Decker Corporation, including serving as Senior Vice President and Chief Financial Officer from 1996 to 1999, Vice President and Chief Financial Officer from 1993 to 1999, Vice President of Finance from 1989 to 1993 and Vice President of Business Planning and Analysis from 1986 to 1989. Before joining Black and Decker, Mr. Schoewe worked for Beatrice Companies, where he was Chief Financial Officer and Controller of one of its subsidiaries, Beatrice Consumer Durables Inc. Mr. Schoewe serves on the Boards of Directors of General Motors Corporation, Kohlberg Kravis Roberts and Company and PulteGroup Inc.
Key Attributes, Skills and Qualifications
Mr. Schoewe brings extensive financial experience to our Board of Directors, acquired through positions held as the Chief Financial Officer of large public companies, as well as expertise in implementation of Sarbanes-Oxley controls, risk management and mergers and acquisitions. Mr. Schoewe is an audit committee financial expert, as defined by SEC rules, and brings to the board his extensive experience as a member of the audit committee of other public companies. Mr. Schoewe also brings extensive international experience to our Board of Directors as a result of his service as an executive of large public companies with substantial international operations.
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KEVIN W. SHARER, 64 Chairman, Chief Executive Officer and President, Amgen Inc., a biotechnology company.
Director since 2003
Member of the Policy Committee |
Mr. Kevin W. Sharer has served as Chairman of the Board of Amgen since January 2001 and as Chief Executive Officer since May 2000. Mr. Sharer joined Amgen in 1992 as President, Chief Operating Officer and member of the board of directors. Before joining Amgen, Mr. Sharer was Executive Vice President and President of the Business Markets Division at MCI Communications. Prior to MCI, he served in a variety of executive capacities at General Electric and was a consultant for McKinsey & Company. He is Chairman of the board of trustees of the Los Angeles County Museum of Natural History and is a member of the U.S. Naval Academy Foundation Board. Mr. Sharer also serves on the board of directors of Chevron Corporation.
Key Attributes, Skills and Qualifications
Mr. Sharers position as the Chief Executive Officer of a large public company has enabled him to develop significant expertise in strategy, marketing, organization, international and domestic business and crisis management. He brings to our Board of Directors extensive knowledge of human resources and compensation issues as well as experience in dealing with regulatory agencies. Mr. Sharer also served as an officer in the U.S. Navy. He holds board leadership positions at large public companies and non-profit organizations.
Vote Required
To be elected, a nominee must receive more votes cast for than votes cast against his or her election. Abstentions and broker non-votes will have no effect on this proposal. If a nominee is not re-elected, he or she will remain in office until a successor is elected or until his or her earlier resignation or removal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE THIRTEEN NOMINEES FOR DIRECTOR LISTED ABOVE.
10 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 11
CORPORATE GOVERNANCE (continued)
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12 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
CORPORATE GOVERNANCE (continued)
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 13
CORPORATE GOVERNANCE (continued)
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14 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
CORPORATE GOVERNANCE (continued)
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 15
CORPORATE GOVERNANCE (continued)
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Committees of the Board of Directors
The Board of Directors has four standing committees: the Audit Committee, the Compensation Committee, the Governance Committee and the Policy Committee. The membership of these committees is usually determined at the organizational meeting of the Board of Directors held in conjunction with the Annual Meeting of Shareholders. All the committees are composed entirely of independent directors. The primary responsibilities of each of the committees are described below, together with a table listing the membership and chairperson of each committee as of the date of this Proxy Statement.
Director | Board | Audit | Compensation | Governance | Policy | |||||
Wesley G. Bush |
Chair | |||||||||
Lewis W. Coleman |
| | ||||||||
Victor H. Fazio |
| Chair | ||||||||
Donald E. Felsinger |
Chair | | ||||||||
Stephen E. Frank |
Chair | | ||||||||
Bruce S. Gordon |
| | ||||||||
Madeleine A. Kleiner |
| | ||||||||
Karl J. Krapek |
| | ||||||||
Richard B. Myers |
| Chair | ||||||||
Aulana L. Peters |
| | ||||||||
Gary Roughead |
| | ||||||||
Thomas M. Schoewe |
| | ||||||||
Kevin W. Sharer |
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16 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
CORPORATE GOVERNANCE (continued)
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 17
CORPORATE GOVERNANCE (continued)
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18 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
CORPORATE GOVERNANCE (continued)
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 19
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Director Compensation
The Compensation Committee is responsible for reviewing and recommending the compensation of the members of our Board of Directors. In 2011, the Compensation Committee recommended to the Board of Directors, and the Board of Directors approved, the non-employee director fee structure, effective April 1, 2011. The table below lists the annual fees payable to our non-employee directors from January 1, 2011 to March 31, 2011 under the prior director fee structure, as well as the annual fees payable under our current director fee structure effective April 1, 2011.
Compensation Element | Amount ($) (1/1/11 3/31/11) |
Amount ($) (4/1/11 present) |
||||||
Annual Cash Retainer |
100,000 | 115,000 | ||||||
Annual Retainer for Lead Independent Director* |
N/A | 25,000 | ||||||
Audit Committee Retainer |
10,000 | 10,000 | ||||||
Audit Committee Chair Retainer |
15,000 | 15,000 | ||||||
Compensation Committee Chair Retainer |
10,000 | 15,000 | ||||||
Governance Committee Chair Retainer |
10,000 | 10,000 | ||||||
Policy Committee Chair Retainer |
7,500 | 7,500 | ||||||
Annual Equity Grant** |
120,000 | 130,000 |
* | For the period from January 1, 2011 through July 18, 2011, Mr. Coleman served as Non-executive Chairman of the Board of Directors. He was paid the prorated portion of an annual cash retainer of $250,000 for service as the Non-executive Chairman during that period in addition to a prorated portion of the applicable annual cash retainer paid to the other members of the Board of Directors. Mr. Coleman began serving as Lead Independent Director effective July 19, 2011. |
** | The annual equity grant is required to be deferred into a stock unit account pursuant to the 2011 Long-Term Incentive Stock Plan (the 2011 Plan) and the 1993 Stock Plan for Non-Employee Directors, as amended (the 1993 Directors Plan). The equity award provisions of the 1993 Directors Plan also applied to the shares awarded in 2011 pursuant to the 2011 Plan. |
Retainer fees are paid on a quarterly basis at the end of each quarter. To encourage directors to have a direct and material investment in shares of our common stock, each year directors who are not employees must defer at least $130,000 of their annual equity grant in Company stock to be placed in a stock unit account (Automatic Stock Units) to be paid out at the conclusion of the directors board service, or earlier, as specified by the director, if he or she has five or more years of service. In addition, each director may elect to defer payment of all or a portion of his or her remaining annual cash retainer and other annual committee retainer fees into a stock unit account (Elective Stock Units). The Elective Stock Units are paid at the conclusion of board service or earlier as specified by the director, regardless of years of service. All deferral elections must be made prior to the beginning of the year for which the retainer and fees will be paid. Directors are credited with dividend equivalents in connection with the accumulated stock units until the shares of common stock related to such stock units are issued.
All directors are required to own common stock of the Company in an amount equal to five times the annual cash retainer, with such ownership to be achieved within five years of the later of (i) May 18, 2011 or (ii) the directors election to the Board. Deferred stock units and Company stock owned outright by the director count towards this requirement.
Directors are also eligible to participate in our Matching Gifts Program for Education. Under this program, the Company matches director contributions, up to $10,000 per year per director, to eligible educational programs in accordance with the rules of the program.
Security Arrangements for Certain Directors
We maintain a comprehensive security program. As a component of this program, we provide certain individuals with residential and/or travel protection that we consider necessary to address our security requirements. In selecting the level and form of protection, we and the Board of Directors consider both security risks faced by those in our industry in general and security risks specific to our Company and employees.
In 2010, we received specific information from Federal law enforcement officials that led us to conclude that there were threats to the Company and its principals. Based on that information and an ongoing dialogue with law enforcement officials, the Board of Directors has required that Mr. Bush, Mr. Coleman (who served as our Non-Executive Chairman when the threat was
20 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
COMPENSATION OF DIRECTORS (continued)
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identified) and certain NEOs and elected officers receive varying levels of residential and travel protection. Mr. Coleman and Mr. Bush receive additional protection based on the specific threat information. That level of protection was provided for a partial year in 2010 and for the full year in 2011. The security protection for Mr. Coleman in 2011 included housing him in a more secure residence and providing for his personal travel and travel required by his employer using Company-provided aircraft to ensure his security. Consequently, the cost of providing security for Mr. Coleman during 2011 was higher than the cost of providing Mr. Bushs security.
Since we require this protection under a comprehensive security program and it is not designed to provide a personal benefit (other than the intended security), we do not view these security arrangements as compensation to the individuals. We report these security arrangements as perquisites as required under applicable SEC rules. In addition, we would report them as taxable compensation to the individuals, if they were not excludable from income as working condition fringe benefits under Internal Revenue Code Section 132.
We regularly review the nature of the threat and associated vulnerabilities with law enforcement and security specialists, and will continue to revise our security program as appropriate in response to those reviews, including the duration of security coverage required when individuals no longer serve in the roles associated with the threat information.
The table below provides information on the compensation of our non-employee directors for the year ended December 31, 2011.
Name | Fees Earned or Paid in Cash ($) (1) |
Stock Awards ($) (2) |
All
Other Compensation ($) (3) |
Total ($) | ||||||||||||
Lewis W. Coleman |
259,755 | (4) | 127,500 | 5,265,101 | (5) | 5,652,356 | ||||||||||
Thomas B. Fargo (6) |
27,500 | 30,000 | 2,759 | 60,259 | ||||||||||||
Victor H. Fazio |
131,250 | 127,500 | 45,597 | (7)(8) | 304,347 | |||||||||||
Donald E. Felsinger |
125,000 | 127,500 | 78,114 | (8) | 330,614 | |||||||||||
Stephen E. Frank |
136,250 | 127,500 | 23,081 | (8) | 286,831 | |||||||||||
Bruce S. Gordon |
111,250 | 127,500 | 12,683 | (8) | 251,433 | |||||||||||
Madeleine A. Kleiner |
121,250 | 127,500 | 22,637 | (7)(8) | 271,387 | |||||||||||
Karl J. Krapek |
111,250 | 127,500 | 27,558 | (7)(8) | 266,308 | |||||||||||
Richard B. Myers |
118,750 | 127,500 | 23,561 | (8) | 269,811 | |||||||||||
Aulana L. Peters |
121,250 | 127,500 | 35,791 | (7) | 284,541 | |||||||||||
Gary Roughead (9) |
0 | 0 | 0 | 0 | ||||||||||||
Thomas M. Schoewe (10) |
46,535 | 48,397 | 127 | 95,059 | ||||||||||||
Kevin W. Sharer |
111,250 | 127,500 | 48,906 | 287,656 |
(1) | Amounts shown in the Fees Earned or Paid in Cash column reflect the annual retainer paid to each director, including any applicable annual committee retainers. As described above, a director may elect to defer all or a portion of his or her annual retainer into a stock unit account. |
(2) | Represents the target value of Automatic Stock Units awarded to each of our non-employee directors in 2011 under the 2011 Plan and the 1993 Directors Plan. The amount reported in this column for each director reflects the aggregate fair value on the date of grant, as determined under Financial Accounting Standards Board Accounting Standards Codification Topic 718, Stock Compensation, of the stock units for each director, excluding any assumed forfeitures. |
Assumptions used to calculate these amounts are included in Note 17 of our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. |
(3) | Amounts reflected in the All Other Compensation column include the dollar value of additional stock units credited to each non-employee director as a result of dividend equivalents earned on their respective stock units awarded under the 2011 Plan and the 1993 Directors Plan as follows: Mr. Coleman, $61,542; Mr. Fargo, $2,759; Mr. Fazio, $40,484; Mr. Felsinger, $31,310; Mr. Frank, $23,014; Mr. Gordon, $12,514; Ms. Kleiner, $12,514; Mr. Krapek, $22,488; General Myers, $21,222; Ms. Peters, $28,291; Mr. Schoewe, $127; and Mr. Sharer, $48,906. |
Amounts shown also include perquisites and other personal benefits provided to certain of the directors in 2011 for use of Company aircraft for personal travel, including travel expenses for family members accompanying the director while on travel, security and matching contributions made through our Matching Gifts Program for Education discussed above. The cost of any category of the listed perquisites and personal benefits did not exceed the greater |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 21
COMPENSATION OF DIRECTORS (continued)
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of $25,000 or 10% of total perquisites and personal benefits for any director, except for (i) the residential and personal security provided to Mr. Coleman described in footnote 5 below and (ii) Mr. Felsingers personal and spousal travel on Company aircraft ($46,804). |
(4) | Includes $130,027 retainer for service as the Non-Executive Chairman of the Board of Directors from January 1, 2011 to July 18, 2011. |
(5) | Amounts include expenses for residential and personal security required for Mr. Coleman. We calculate the cost of travel security coverage based on the hourly rates and overhead fees charged directly to the Company by the firms providing security personnel. If Company security personnel are used, their hourly rates are used to calculate the cost of coverage for each trip. During 2011, the Company incurred $5,203,559 in costs related to security protection related to Mr. Coleman. These costs include $1,515,536 attributable to personal and family member travel on Company aircraft consistent with our security program discussed above and a $174,953 tax gross-up. |
(6) | Admiral Thomas B. Fargo resigned from the Board of Directors and its committees on March 21, 2011. All amounts shown for 2011 were paid in cash upon Admiral Fargos resignation from service on the Board of Directors. |
(7) | Amounts include matching contributions made through our Matching Gifts Program for Education discussed above as follows: Mr. Fazio, $5,000; Ms. Kleiner, $10,000; Mr. Krapek, $5,000; and Ms. Peters, $7,500. |
(8) | Includes spousal travel on Company aircraft. To calculate the value of personal use of Company aircraft, we calculate the incremental cost of each element, which includes trip-related crew hotels and meals, in-flight food and beverages, landing and ground handling fees, hourly maintenance contract costs, hangar or aircraft parking costs, fuel costs based on the average annual cost of fuel per mile flown and other smaller variable costs. Fixed costs that would be incurred in any event to operate Company aircraft (e.g., aircraft purchase costs, maintenance not related to personal trips and flight crew salaries) are not included. |
(9) | Admiral Roughead was elected to the Board of Directors on February 14, 2012. |
(10) | Mr. Schoewe was elected to the Board of Directors on August 17, 2011. Amounts shown reflect the prorated amounts of Mr. Schoewes retainer fees and equity grant for 2011. |
Deferred Stock Units
As of December 31, 2011, the non-employee directors had the following aggregate number of deferred stock units accumulated in their deferral accounts for all years of service as a director, including additional stock units credited as a result of dividend equivalents earned on the stock units.
Name | Automatic Stock Units |
Elective Stock Units |
Total | |||||||||
Lewis W. Coleman |
14,221 | 21,798 | 36,019 | |||||||||
Thomas B. Fargo* |
0 | 0 | 0 | |||||||||
Victor H. Fazio |
11,807 | 11,699 | 23,506 | |||||||||
Donald E. Felsinger |
10,805 | 8,270 | 19,075 | |||||||||
Stephen E. Frank |
13,430 | 0 | 13,430 | |||||||||
Bruce S. Gordon |
7,883 | 0 | 7,883 | |||||||||
Madeleine A. Kleiner |
7,883 | 0 | 7,883 | |||||||||
Karl J. Krapek |
7,883 | 6,388 | 14,271 | |||||||||
Richard B. Myers |
12,483 | 0 | 12,483 | |||||||||
Aulana L. Peters |
14,221 | 2,159 | 16,381 | |||||||||
Gary Roughead** |
0 | 0 | 0 | |||||||||
Thomas M. Schoewe |
784 | 0 | 784 | |||||||||
Kevin W. Sharer |
14,217 | 14,388 | 28,605 |
* | Admiral Fargos Automatic Stock Units held as of December 31, 2010 were paid to him in the form of Company common stock upon his resignation from the Board of Directors in March, 2011. Mr. Fargo did not hold any Elective Stock Units as of December 31, 2010. Mr. Fargos Automatic Stock Units earned for the quarter ended March 31, 2011, were paid in cash. |
** | Admiral Roughead was elected to the Board of Directors on February 14, 2012. |
22 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
COMPENSATION OF DIRECTORS (continued)
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Prior Non-Employee Directors Equity Plans
The 1995 Stock Plan for Non-Employee Directors (the 1995 Directors Plan) provided for the annual grant of nonqualified stock options to each non-employee director to purchase shares of common stock with an exercise price equal to the fair market value of a share of common stock on the grant date. Since June 2005, no new grants have been issued pursuant to the 1995 Directors Plan. Awards subsequent to 2005 have been issued pursuant to the 1993 Directors Plan and the 2011 Plan. All stock options currently outstanding under the 1995 Directors Plan have a term of ten years from the date of grant. If the individual ceases to serve as a director, the stock options continue to be exercisable for the lesser of five years or the expiration of the original term of the stock options. If the termination of the individuals service is for cause, the stock options terminate and are automatically forfeited when the director ceases to serve.
Each non-employee director had the following aggregate number of shares underlying outstanding stock option awards that are exercisable as of December 31, 2011:
Name | # Shares
Underlying Outstanding Option Awards |
|||
Lewis W. Coleman |
0 | |||
Thomas B. Fargo |
0 | |||
Victor H. Fazio |
6,562 | |||
Donald E. Felsinger |
0 | |||
Stephen E. Frank |
0 | |||
Bruce S. Gordon |
0 | |||
Madeleine A. Kleiner |
0 | |||
Karl J. Krapek |
0 | |||
Richard B. Myers |
0 | |||
Aulana L. Peters |
6,562 | |||
Gary Roughead |
0 | |||
Thomas M. Schoewe |
0 | |||
Kevin W. Sharer |
6,562 |
Director Equity Plan
Under the Northrop Grumman Non-Employee Directors Equity Participation Plan (the Director Equity Plan), non-employee directors had an amount equal to 50% of their annual retainer credited to an equity participation account and converted into stock units based on the then fair market value (as defined in the Director Equity Plan) of our common stock. Because no new participants have been added to the Director Equity Plan since May 31, 2005, only Ms. Peters and Messrs. Coleman, Fazio and Sharer participate in this plan. Generally, if a participating non-employee director terminates service on the Board of Directors after completion of at least three consecutive years of service or retires from the Board of Directors as a result of a total disability or a debilitating illness as defined in the Director Equity Plan, the participant will be entitled to receive the full balance of the participants equity participant account in annual installments. If a participant terminates service on the Board of Directors prior to completing three consecutive years of service and the termination occurs because he or she will have attained age 70 prior to the annual meeting of shareholders, the participant will be entitled to a partial amount of his or her equity participation account. Upon a change in control of the Company, as defined in the Director Equity Plan, non-employee directors will immediately be entitled to receive the full balance of their equity participation account under the Director Equity Plan regardless of the number of years of consecutive service, although payments of their benefits will not commence until the termination of his or her service. No new annual accruals have been credited to the Director Equity Plan; however, the directors participating in the Director Equity Plan do receive quarterly dividend accruals on the balances held in their respective equity participation accounts.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 23
TRANSACTIONS WITH RELATED PERSONS AND CONTROL PERSONS
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24 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
TRANSACTIONS WITH RELATED PERSONS AND CONTROL PERSONS (continued)
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 25
VOTING SECURITIES AND PRINCIPAL HOLDERS
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Stock Ownership of Certain Beneficial Owners
On December 31, 2011, there were 253,889,662 shares of our common stock outstanding. The following entities beneficially owned, to our knowledge, more than five percent of the outstanding common stock as of December 31, 2011:
Name and Address of Beneficial Owner | Amount and Nature
of Beneficial Ownership |
Percent of Class |
||||||
State Street Corporation |
29,951,601 shares | (1) | 11.80 | % | ||||
One Lincoln Street, Boston, MA 02111 |
||||||||
Capital World Investors |
14,964,223 shares | (2) | 5.89 | % | ||||
333 South Hope Street, Los Angeles, CA 90071 |
||||||||
BlackRock, Inc. |
22,078,875 shares | (3) | 8.70 | % | ||||
40 East 52nd Street, New York, NY 10022 |
(1) | This information was provided by State Street Corporation (State Street) in a Schedule 13G filed with the SEC on February 13, 2012. According to State Street, as of December 31, 2011, State Street had shared voting power over 29,951,601 shares and shared dispositive power over 29,886,167 shares. This total includes 18,860,833 shares held in the Defined Contributions Master Trust for the Northrop Grumman Savings Plan and the Northrop Grumman Financial Security and Savings Program, for which State Street Bank and Trust Company acts as trustee and investment manager. |
(2) | This information was provided by Capital World Investors, a division of Capital Research and Management Company (Capital World), in a Schedule 13G/A filed with the SEC on February 10, 2012. According to Capital World Investors, as of December 31, 2011, Capital World Investors had sole dispositive power over 14,964,223 shares and sole voting power over 2,489,223 shares. |
(3) | This information was provided by BlackRock, Inc. (BlackRock) in a Schedule 13G/A filed with the SEC on February 10, 2012. According to BlackRock, as of December 31, 2011, BlackRock had sole voting and dispositive power over 22,078,875 shares. |
26 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
VOTING SECURITIES AND PRINCIPAL HOLDERS (continued)
|
Shares of Common
Stock Beneficially Owned |
Share Equivalents(1) |
Shares Subject To Option(2) |
Total | |||||||||||||
Non-Employee Directors |
||||||||||||||||
Lewis W. Coleman |
0 | 36,019 | 0 | 36,019 | ||||||||||||
Victor H. Fazio |
11,277 | (3) | 17,451 | 6,562 | 35,289 | |||||||||||
Donald E. Felsinger |
0 | 19,075 | 0 | 19,075 | ||||||||||||
Stephen E. Frank |
1,000 | 13,430 | 0 | 14,430 | ||||||||||||
Bruce S. Gordon |
0 | 7,883 | 0 | 7,883 | ||||||||||||
Madeleine A. Kleiner |
0 | 7,883 | 0 | 7,883 | ||||||||||||
Karl J. Krapek |
0 | 14,271 | 0 | 14,271 | ||||||||||||
Richard B. Myers |
0 | 12,483 | 0 | 12,483 | ||||||||||||
Aulana L. Peters |
14,542 | (4) | 14,314 | 3,281 | 32,137 | |||||||||||
Gary Roughead |
0 | 0 | 0 | 0 | ||||||||||||
Thomas M. Schoewe |
1,660 | 784 | 0 | 2,444 | ||||||||||||
Kevin W. Sharer |
2,995 | 28,605 | 6,562 | 38,162 | ||||||||||||
Named Executive Officers |
||||||||||||||||
Wesley G. Bush (5) |
212,733 | (6) | 4,948 | 1,274,264 | 1,491,945 | |||||||||||
James F. Palmer |
72,424 | 0 | 430,745 | 503,169 | ||||||||||||
Gary W. Ervin |
10,155 | (7) | 7,302 | 255,706 | 273,163 | |||||||||||
James F. Pitts |
21,829 | 0 | 448,409 | 470,238 | ||||||||||||
Linda A. Mills |
43,871 | (8) | 11,893 | 297,687 | 353,451 | |||||||||||
Other Executive Officers |
71,541 | 3,582 | 291,280 | 366,403 | ||||||||||||
All Directors and Executive Officers as a Group (24 persons) |
464,026 | 199,923 | 3,014,496 | 3,678,445 | (9) |
(1) | Share equivalents for directors represent non-voting deferred stock units acquired under the 2011 Plan and the 1993 Directors Plan, some of which are paid out in shares of common stock at the conclusion of a director-specified deferral period, and others are paid out upon termination of the directors service on the Board of Directors. Certain of the Named Executive Officers hold share equivalents with pass-through voting rights in the Northrop Grumman Savings Plan. |
(2) | These shares subject to option are either currently exercisable or exercisable within 60 days of March 20, 2012. |
(3) | Includes 811 shares held in our Dividend Reinvestment Plan. |
(4) | Includes 12,475 shares held in the Peters Family Trust of which Ms. Peters is the trustee. |
(5) | Mr. Bush is also Chairman of the Board of Directors. |
(6) | The shares are held in the W.G. and N.F. Bush Family Trust of which Mr. Bush and his wife are trustees. |
(7) | The shares are held in the G&M Ervin Family Trust. |
(8) | The shares are held by the Linda Anne Mills Living Trust. |
(9) | Total represents 1.45% of the outstanding common stock. |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 27
EQUITY COMPENSATION PLAN INFORMATION
|
Plan category | Number of shares
of common stock to be issued upon exercise of outstanding options and payout of outstanding awards (1) |
Weighted-average exercise price of outstanding options (2) |
Number of shares of common stock under equity compensation
plans |
|||||||||
Equity compensation plans approved by shareholders |
21,600,864 | $53 | 46,692,793 | |||||||||
Equity compensation plans not approved by shareholders |
N/A | N/A | N/A | |||||||||
Total |
21,600,864 | $53 | 46,692,793 | (4) |
(1) | Of these shares, 32,810 were subject to stock options then outstanding under the 1995 Directors Plan, 44,242 were subject to stock options then outstanding under the 2011 Plan, 11,513,910 were subject to stock options then outstanding under the 2001 Plan, and 152,744 options were outstanding as a result of conversions from TRW Inc. stock plans. In addition, this number includes 130,270 shares that were subject to outstanding stock awards granted under the 2011 Plan, 3,491,462 shares that were subject to outstanding stock awards granted under the 2001 Plan, and reflects 2,802,352 awards earned at year end but pending distribution, and 180,332 shares subject to outstanding stock units credited under the 1993 Directors Plan. Additional performance shares of 3,252,742 reflect the number of shares deliverable under payment of outstanding restricted performance stock rights, assuming maximum performance criteria have been achieved. Included in this number are 2,796,302 shares subject to stock options that were out-of-the-money as of December 31, 2011. |
(2) | This number reflects the weighted-average exercise price of outstanding stock options and has been calculated exclusive of outstanding restricted performance stock right and restricted stock right awards, and exclusive of stock units credited under the 2011 Plan and the 1993 Directors Plan. |
(3) | Of the aggregate number of shares that remained available for future issuance, 46,692,793 were available under the 2011 Plan as of December 31, 2011. No new awards may be granted under the 1993 Stock Plan or the 2001 Plan. |
(4) | After giving effect to our February 2012 awards, the number of shares of common stock remaining for future issuance would be 36,105,499 (assuming maximum payout of such awards). |
28 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K of the Securities and Exchange Commission with management and, based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement. The Board has approved that recommendation.
COMPENSATION COMMITTEE
DONALD E. FELSINGER, CHAIRMAN
LEWIS W. COLEMAN
BRUCE S. GORDON
KARL J. KRAPEK
RICHARD B. MYERS
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 29
COMPENSATION DISCUSSION AND ANALYSIS
|
In this section, we provide an overview of our executive compensation philosophy. This section also describes the material components of our executive compensation program for our 2011 Named Executive Officers or NEOs listed below and explains how and why the Compensation Committee of our Board (the Compensation Committee) arrived at specific compensation policies and decisions involving the NEOs. The 2011 compensation earned by our NEOs is set forth in the 2011 Summary Compensation Table and other compensation tables contained in this Proxy Statement.
2011 NAMED EXECUTIVE OFFICERS
|
Name | Position | |||||||||
Wesley G. Bush |
Chairman of the Board, Chief Executive Officer & President | |||||||||
James F. Palmer |
Corporate Vice President & Chief Financial Officer | |||||||||
Gary W. Ervin |
Corporate Vice President & President, Aerospace Systems | |||||||||
James F. Pitts |
Corporate Vice President & President, Electronic Systems | |||||||||
Linda A. Mills |
Corporate Vice President & President, Information Systems | |||||||||
SHAREHOLDER ENGAGEMENT
We welcome feedback from our shareholders regarding our executive compensation program. Shareholders desiring to communicate with the Board or Compensation Committee may do so as described under Communications with the Board of Directors in this Proxy Statement.
|
30 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY
|
* | Cash from operations and free cash flow presented above are before discretionary after-tax pension contributions of $648 million in 2011 and $539 million in 2010. The information presented is a non-GAAP metric. For more information see Miscellaneous Use of Non-GAAP Financial Measures on page 71 of this Proxy Statement |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 31
COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY (continued)
|
Our Compensation Strategy and Alignment with Our Shareholders
¡ | Our incentive plans are aligned with the interests of our shareholders and are designed to motivate and reward strong financial performance. Two years ago we shifted away from internal, plan-based performance metrics and established peer-based financial goals to improve our performance relative to nine peers in the aerospace and defense industry. |
¡ | Our annual incentive program uses a peer pay for performance approach, as defined by a set of financial and non-financial metrics. Our financial metrics are weighted as follows: New Business Awards (20%), Pension-Adjusted Operating Margin Rate (Pension-Adjusted OM Rate) (40%), and FCF Conversion (40%). In only two years, this focus on peer-based metrics has driven our Companys performance to above-average peer financial performance. Company leaders and key employees who have the ability to most impact the achievement of our business results are eligible to participate in the program. |
¡ | For purposes of measuring our financial performance, we define our peer group as the nine largest companies (measured by sales) of the aerospace and defense industry in the U.S. and Europe. |
¡ | Our Long-Term Incentive (LTI) program rewards performance over a three-year performance period to encourage sustainability over time for our investors. Beginning in 2010, all NEOs are measured on relative total shareholder return during this three year period. |
Compensation and Corporate Governance Features
We endeavor to maintain good governance practices with respect to the oversight of our executive compensation policies. The following policies and practices, among others, were in effect during 2011.
¡ | Our Board of Directors is led by a Chairman, who also is our CEO, and a Lead Independent Director, who are designated by the independent directors. Our Compensation Committee Chairperson is an independent director with strong compensation and leadership experience; |
¡ | Our stock ownership policy defines clear stock ownership guidelines for our executive officers, including the NEOs. As of December 31, 2011, each of the NEOs satisfied his or her individual stock ownership level in accordance with these guidelines. Beginning with the 2010 grant, equity awards to officers are subject to new stock retention requirements. Fifty percent (50%) of the net shares acquired upon the exercise of stock options or the payment or vesting of any performance shares are required to be held for a period of three years. These restrictions generally continue upon termination and retirement as described in detail below; |
¡ | Under our clawback policy, certain incentive compensation awards are subject to recovery if our financial results are restated; |
¡ | We previously eliminated all individual change in control agreements and tax gross-up benefits (other than those gross up payments associated with certain Company-wide plans such as relocation); and |
¡ | Our independent compensation consultant, Frederic W. Cook & Co, is retained directly by the Compensation Committee and performs no other services for the Company. |
32 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY (continued)
|
Executive Compensation Decisions: A Look Forward to 2012
The Compensation Committee has taken certain actions based in part on shareholder feedback on pay-for- performance objectives as well as our desire to provide competitive reward and retention value to our key executives. The Committee has:
¡ | maintained NEO 2012 base salaries at their 2011 levels; |
¡ | revised our executive retirement benefits, eliminating pay-based accruals in legacy defined benefit and Supplemental Executive Retirement Plans (SERPs) effective January 1, 2015, to better align the benefits offered with current market practices, reduce costs, and decrease non-performance-based elements of executive compensation; |
¡ | increased 2012 annual cash-based bonus performance targets by 25 percentage points for NEOs other than the CEO to better align with market practices; the CEO 2012 annual performance target will remain at the 2011 level for 2012; |
¡ | in response to shareholder preference for full-value equity grants, changed the portfolio mix for 2012 equity grants for elected officers to a mix of restricted performance stock rights (RPSRs) and restricted stock rights (RSRs), eliminating grants of stock options; and |
¡ | changed the terms and methodology for the grants of long-term performance shares to elected officers who are also members of the Corporate Policy Council (CPC) to better align their interests with shareholder interests; these changes include: reducing the maximum payout under the programs from 200% of the RPSR award granted to 150% of the RPSR award granted and limiting the payout to no more than 100% of shares granted if absolute total shareholder return over the performance period is negative, even if our performance relative to the other industry benchmarks would have resulted in a higher score. |
In his first two years as CEO, the Board of Directors made larger equity grants to the CEO in recognition of the significant increase in responsibilities, competitive market data and economic alignment with shareholder interests. In 2010, the equity grant value was $15,505,013, and in 2011 it was $12,977,692. For 2012, the Board of Directors determined that sufficient economic alignment was attained and approved a market median LTI grant at $8,000,000.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 33
COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES |
Compensation Philosophy and Objectives
The philosophy underlying our executive compensation program is to provide an attractive, flexible and market-based total compensation program tied to performance and aligned with the interests of our shareholders. Our objective is to recruit and retain the caliber of executive officers and other key employees necessary to deliver sustained high performance to our shareholders, customers and communities.
The Compensation Committee oversees our executive compensation and benefit programs. In its oversight of our compensation programs, the Compensation Committee is guided by the following principles:
¡ | Pay for Performance: 2011 is the second year in which we have used a compensation structure based on peer-benchmarked performance metrics for our incentive plans, designed to drive superior results as compared to defense industry performance rather than internal operational goals. |
¡ | Industry Benchmarking: We evaluate our compensation programs and financial objectives on an annual basis and modify them in accordance with overarching industry and business conditions. When defining key operational (annual) and strategic (long-term) performance metrics, we seek to outperform our peers (a group of nine aerospace and defense companies). We also utilize two larger peer groups specifically to track and monitor executive compensation practices and levels in the overall marketplace of companies similar in revenue size to the Company. |
¡ | Ensure Leadership Retention and Succession: Compensation is designed to be competitive within our industry and retentive for key individuals who contribute to the achievement of business goals. Our programs are designed to motivate and reward NEOs for delivering operational and strategic performance and maximizing shareholder returns, while continuing to uphold our values. |
¡ | Align Pay Programs with Shareholder Interests: The Committee supports a compensation structure that places an appropriate level of compensation at risk based on our financial and non-financial (qualitative) performance, individual performance and relative total shareholder return. Our financial results predominantly determine the annual incentive compensation and are the sole factor in our long-term compensation. Achievement of both annual incentive goals and increased shareholder value will result in individual awards commensurate with results; however, failure to deliver shareholder value will negatively affect compensation for all NEOs. In addition, we have stock ownership guidelines for all executives and implemented holding requirements for equity grants beginning in 2010. |
¡ | Ensure Long-Term Sustained Performance: Our annual incentive plan includes both financial and non-financial metrics to ensure that we are building a strong foundation for growth and sustainable customer relationships. We expect all employees to adhere to the Companys values and execute annual plans while improving quality, customer satisfaction, employee engagement, diversity, safety and environmental performance. |
¡ | Risk Management: The Board of Directors evaluates the Companys risk profile on an ongoing basis to mitigate concerns of executives being overly leveraged to achieve near-term stock price growth. Both the Compensation Committee and its independent compensation consultant evaluate the mix of compensation at-risk linked to stock appreciation. |
34 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES (continued)
|
HOW WE MAKE COMPENSATION DECISIONS
Role of Compensation Committee
The Compensation Committee is responsible for overseeing our compensation policies and programs, administering our incentive and equity compensation plans, and approving all payments or grants under these plans for elected officers (other than the CEO). The Compensation Committee recommends the compensation for our CEO to the independent directors of the Board for approval and approves all compensation recommendations for elected officers of the Company. Among its duties, the Compensation Committee also:
¡ | reviews market data and all other input from its independent compensation consultant; |
¡ | reviews and approves incentive goals and objectives relevant to elected officer compensation; |
¡ | evaluates the competitiveness of each elected officers total compensation package; and |
¡ | approves any changes to each elected officers total compensation package (other than the CEO), including, but not limited to, base salary, annual and long-term incentive award opportunities and payouts, and retention programs. |
For more information regarding the duties and responsibilities of the Compensation Committee and the composition of the Compensation Committee, see Corporate Governance Committees of the Board of Directors Compensation Committee. The Compensation Committees charter can be found on our website at www.northropgrumman.com.
Role of Independent Compensation Consultant
The Compensation Committee retains an independent compensation consultant, Frederic W. Cook & Co. (the Compensation Consultant), to provide advice in determining the levels and structure of our executive compensation policies and procedures. The Compensation Consultant reports directly to the Compensation Committee and the Compensation Committee may replace the Compensation Consultant or hire additional consultants at any time. A representative of the Compensation Consultant attends meetings of the Compensation Committee, as requested, and communicates with the Compensation Committee Chairperson between meetings; however, the Compensation Committee and the independent directors of the Board of Directors make final decisions on all compensation actions for the NEOs and other elected officers. Other than the fees paid to the Compensation Consultant pursuant to its engagement by the Compensation Committee for its advice on executive and director compensation, the Compensation Consultant does not receive any fees or income from, nor does it perform any services for, the Company.
The Compensation Consultants role is to provide an independent review of market data and to advise the Compensation Committee on all compensation matters for elected officers, including the NEOs. The Compensation Consultant utilizes aerospace and defense industry market data supplied by both Aon Hewitt and Towers Watson and conducts an independent review of publicly available data.
The specific roles of the Compensation Consultant include:
¡ | review our total compensation philosophy, peer groups and target competitive positioning for reasonableness and appropriateness; |
¡ | identify and advise the Compensation Committee on market trends and practices; |
¡ | provide proactive advice to the Compensation Committee on best practices for Board governance of executive compensation, as well as any areas of concern or risk that may exist or be anticipated in the design of our executive compensation programs; and |
¡ | serve as a resource to the Compensation Committee Chairperson on setting agenda items for Compensation Committee meetings and undertaking special projects. |
Role of Management
Our CEO makes compensation-related recommendations for elected officers to the Compensation Committee for their review and approval based on managements review of each officers compensation relative to market and the overall framework, philosophy and objectives for our compensation programs set by the Compensation Committee. The CEO does not make any compensation recommendations for himself to the Compensation Committee.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 35
COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES (continued)
|
The recommendations for elected officers include an assessment of each executives performance, skills and industry knowledge, as well as succession and potential retention risks. The Chief Human Resources Officer provides tally sheets that summarize the historical and current total compensation and benefits for each NEO. These tally sheets are provided to the Compensation Committee to ensure that compensation decisions are made within our total compensation framework. The value of nonqualified deferred compensation, outstanding equity awards, health and welfare benefits, pension benefits and perquisites is also included.
Management also provides recommendations to the Compensation Committee regarding all executive incentive and benefit plan designs and strategies. These recommendations include financial and non-financial operational goals and criteria for our annual and long-term incentive plans.
Management conducts an annual performance assessment process during the first quarter of each year in which individual performance during the prior performance year is evaluated against pre-set financial, operational and individual goals. This practice ensures that compensation is tied to our financial and operating performance, individual achievement and demonstration of our strategic initiatives and values.
Use of Competitive Data
Industry Benchmarking for Performance
In 2010, we changed how we set goals for purposes of administering our annual incentive compensation plan, shifting from performance metrics linked to internal criteria to metrics based on peer benchmarks. We continued with this philosophy in 2011.
The Performance Peer Group consists of the nine largest competitor companies in the aerospace and defense market in the U.S. and Europe measured by sales. While we sometimes face competition from smaller companies in some market areas, in particular our Technical Services and Information Systems sectors, the Compensation Committee determined that this group is the most appropriate for measuring overall financial performance as the nine companies represent the majority of the value of contracts awarded in our competitive space. The Compensation Committee uses information about the Performance Peer Group for setting annual performance targets and evaluating performance for purpose of award payments under our annual incentive plans.
The direct competitors included in the Performance Peer Group are:
PERFORMANCE PEER GROUP | ||||||||
BAE Systems |
Finmeccanica | Lockheed Martin Corp. | ||||||
The Boeing Company |
General Dynamics | Raytheon Corp. | ||||||
EADS |
L-3 Communications |
SAIC, Inc. |
For peers with substantial commercial business (Boeing, EADS, General Dynamics and Finmeccanica), we focus our comparisons on the government businesses of these companies, when such data is available. Such data is generally available at the government business level for operating margin rate and awards, but free cash flow and asset turns are typically available only at the total company level.
Peer Groups for Evaluating Compensation Practices and Executive Pay
The Compensation Committee utilizes a Target Industry Peer Group as the reference for market data for executive compensation levels and practices. It is comprised of 14 companies, including six of the nine largest worldwide defense contractors with which we compete for executive talent (Boeing, General Dynamics, Honeywell International, Lockheed Martin and United Technologies). Eight additional companies were added to this list of six companies because they were prevalent in the core competitor peer lists. In addition, the Compensation Committee utilizes a broader industry peer group, the General Industry Peer Group, as a broader reference of executive compensation practices. The General Industry Peer Group is comprised of Fortune 100 companies (excluding financial services) participating in Aon Hewitts executive compensation survey. For 2011, the General Industry Peer Group included 49 companies.
36 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES (continued)
|
It is the Companys pay philosophy to target the size-adjusted median level of total compensation opportunity, while positioning total direct pay elements (e.g. base salary, target annual incentive awards, and target long-term incentive award opportunities) at levels approximating the median of market for target performance. Actual salaries may differ from our stated market positioning based on experience, sustained performance, growth in job, and leadership ability. Actual annual incentive awards and long-term incentive awards opportunities reflect these factors, as well as Company and business performance. In 2011, the actual total compensation level of the NEOs ranged from 122% - 131% of the Target Industry Peer Group size-adjusted market median, with the exception of Jim Pitts, Corporate Vice President and President, Electronic Systems Sector. Mr. Pitts total compensation level was 152% of the size-adjusted market median, reflecting actual performance above market for the Electronic Systems Sector, as well as his participation and tenure in legacy pension benefits.
Target Industry Peer Group
The Target Industry Peer Group consists of the companies in the table below. For 2011, compared to the peers in the Target Industry Peer Group, we approximated the median in revenue and net income, we were between the 25th percentile and the median in number of employees, and we were at the 25th percentile in market capitalization value.
For 2011, the Target Industry Peer Group consisted of the following companies:
2011 TARGET INDUSTRY PEER GROUP | ||||
3M Company |
ITT Corp | |||
The Boeing Company |
Johnson Controls, Inc. | |||
Caterpillar, Inc. |
L-3 Communications Holdings, Inc. | |||
Emerson Electric Company |
Lockheed Martin Corp. | |||
General Dynamics |
Raytheon Corp. | |||
Goodrich Corp. |
SAIC, Inc. | |||
Honeywell International, |
United Technologies Corp. |
General Industry Peer Group
For 2011, the General Industry Peer Group consisted of the following companies:
2011 GENERAL INDUSTRY PEER GROUP | ||||||||||||||||||||
3M Company |
Cisco Systems, Inc. |
Ford Motor Company | IBM Corporation | PepsiCo, Inc. | The Home Depot, Inc. | |||||||||||||||
Abbott Laboratories |
Comcast Corporation | General Dynamics Corporation |
Intel Corporation | Philip Morris International | The Procter & Gamble Company | |||||||||||||||
Aetna, Inc. |
CVS Corporation |
General Electric Corporation | Johnson & Johnson |
Sunoco, Inc. | The Walt Disney Company | |||||||||||||||
Archer Daniels Midland Company |
Deere & Company |
General Motors Corporation | Johnson Controls, Inc. | SUPERVALUE, Inc. | United Technologies Corporation | |||||||||||||||
AT&T, Inc. |
Delta Air Lines, Inc. |
HCA Holdings, Inc. |
Kraft Food, Inc. | Target Corporation | United Health Group | |||||||||||||||
Best Buy Company, Inc. |
E.I. du Pont de Nemours & Company | Hewlett-Packard Company | Lockheed Martin Corporation | The Boeing Company | Valero Energy Corporation | |||||||||||||||
Caterpillar, Inc. |
Exxon Mobil Corporation | Honeywell International, Inc. |
Merck & Co. | The Coca-Cola Co. | Verizon Communications, Inc. | |||||||||||||||
Chevron Corporation |
FedEx Corporation |
Humana, Inc. | Metropolitan Life Insurance Company |
The Dow Chemical Company | Wal-Mart Stores, Inc. | |||||||||||||||
Wellpoint, Inc. |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 37
COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS
|
Elements of Compensation
For 2011 the compensation elements for the NEOs are summarized in the table below and described in more detail following the table.
Compensation Component |
Key Characteristics | Purpose | ||
Base Salary |
Fixed compensation component. Reviewed annually and adjusted if and when appropriate. | Intended to compensate an executive officer fairly for the responsibility level of the position. | ||
Annual Incentive Awards |
Variable compensation component. Performance-based award determined by annual corporate performance as well as individual contributions to that performance. | Intended to motivate and reward executives for achieving short-term (annual) business objectives that drive overall performance; intended to encourage accountability by rewarding based on performance. | ||
Long-Term Incentive Awards |
Variable compensation component. Performance-based award opportunity, generally granted annually, which may include stock options, restricted performance stock rights or restricted stock rights. Amounts actually earned will vary based on relative total shareholder return. | Intended to motivate executive officers to achieve our business objectives by tying incentives to the performance of our stock over the long-term and reinforce the link between the interests of our executive officers and our shareholders. Serves as key retention vehicle for executives. | ||
Health and Welfare and Retirement Plans |
Fixed compensation component. | Intended to provide benefits that promote employee health, productivity and retention. | ||
Perquisites and Other Benefits |
Fixed compensation component. | Intended to provide a business-related benefit to our Company, and to assist in attracting and retaining executive officers. | ||
Severance Benefits |
Fixed compensation component. | Intended to provide temporary income replacement following an executive officers involuntary termination of employment. The CEO is not covered under our severance plans or policies. No executives have any change in control agreements as of December 31, 2010. |
38 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS (continued)
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 39
COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS (continued)
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40 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS (continued)
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Each CPF financial metric/goal is described below and shown with its relative weighting:
Metric/Goal | Weighting | Threshold Performance |
Target Performance |
Maximum Performance |
2011 Actual |
|||||||||||||||
New Business Awards* |
20 | % | $ | 18.0 | $ | 22.0 | $ | 28.0 | $ | 25.3 | ||||||||||
Pension-Adjusted OM Rate/Risk |
40 | % | 8.5 | % | 9.5 | % | 10.5 | % | 10.9 | % | ||||||||||
FCF Conversion** |
40 | % | 80 | % | 100 | % | 135 | % | 120 | % |
* | Dollar amounts in billions. |
** | FCF to net income conversion. |
Based on Company performance for the three factors shown in the table above, the final financial score for the Company was 179%. For non-financial metrics, the Company score was 100%. Multiplying the financial metric and the non-financial metric scores yields 179%. Based on overall assessment of the four operating units, the CEO recommended to the Compensation Committee a final CPF of 179%. After reviewing the Companys overall performance, the Compensation Committee approved a final CPF of 179%.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 41
COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS (continued)
|
Recently Completed RPSR Performance Period (2009 2011)
During the February 2012 meeting, the Compensation Committee reviewed performance for the January 1, 2009 to December 31, 2011 RPSR performance period. For the 2009 grant, the Compensation Committee focused on improving pension-adjusted operating margin rate and Return on Net Assets (RONA) and established the following performance criteria:
Metric/Goal | Weighting | Threshold Performance |
Target Performance |
Maximum Performance |
2011 Actual |
|||||||||||||||
2011 Pension-Adjusted OM Rate* |
50 | % | 8.4 | % | 9.2 | % | 10.0 | % | 10.9 | % | ||||||||||
2011 Pension-Adjusted RONA ** |
50 | % | 13.0 | % | 14.0 | % | 15.0 | % | 15.1 | % |
* | Operating margin adjusted for FAS/CAS net pension income |
** | Return on net assets excluding FAS/CAS net pension income and pension assets and liabilities |
42 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS (continued)
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 43
COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS (continued)
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44 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS (continued)
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 45
COMPENSATION DISCUSSION AND ANALYSIS | SUMMARY COMPENSATION TABLE
|
2011 Summary Compensation Table
Name & Principal Position | Year |
Salary
(1) ($) |
Bonus
(2) ($) |
Stock Awards (3) ($) |
Option Awards (3) ($) |
Non-Equity Incentive Plan Compensation (4) ($) |
Change in ($) |
All
Other Compensation (6) ($) |
Total ($) |
|||||||||||||||||||||||||||
Wesley G. Bush Chairman, Chief Executive Officer and President |
2011 | 1,471,251 | 0 | 9,400,723 | 3,576,969 | 4,027,500 | 5,276,169 | 2,489,832 | 26,242,444 | |||||||||||||||||||||||||||
2010 | 1,334,615 | 0 | 8,349,848 | 7,155,165 | 3,037,500 | 699,987 | 2,272,297 | 22,849,412 | ||||||||||||||||||||||||||||
2009 | 950,000 | 0 | 4,121,084 | 2,382,560 | 1,068,750 | 1,702,285 | 157,401 | 10,382,080 | ||||||||||||||||||||||||||||
James F. Palmer Corporate Vice President and Chief Financial Officer |
2011 | 845,258 | 250,000 | 2,350,181 | 894,246 | 1,250,000 | 1,190,384 | 918,134 | 7,698,203 | |||||||||||||||||||||||||||
2010 | 820,194 | 0 | 4,907,860 | 4,477,369 | 1,000,000 | 994,044 | 151,137 | 12,350,604 | ||||||||||||||||||||||||||||
2009 | 800,001 | 233,333 | 2,015,552 | 1,165,941 | 820,000 | 520,661 | 133,373 | 5,688,861 | ||||||||||||||||||||||||||||
Gary W. Ervin Corporate Vice President and President, Aerospace Systems |
2011 | 845,257 | 0 | 3,628,648 | 894,246 | 1,250,000 | 1,146,473 | 202,873 | 7,967,497 | |||||||||||||||||||||||||||
2010 | 781,731 | 0 | 2,406,340 | 1,524,405 | 1,000,000 | 483,435 | 195,386 | 6,391,297 | ||||||||||||||||||||||||||||
2009 | 598,077 | 0 | 1,576,450 | 912,554 | 600,000 | 286,428 | 97,280 | 4,070,789 | ||||||||||||||||||||||||||||
James F. Pitts (7) Corporate Vice President and President, Electronic Systems |
2011 | 845,258 | 0 | 2,350,181 | 894,246 | 1,200,000 | 2,354,970 | 164,830 | 7,809,485 | |||||||||||||||||||||||||||
2010 | 781,731 | 0 | 2,406,340 | 1,524,405 | 1,000,000 | 1,793,114 | 122,898 | 7,628,488 | ||||||||||||||||||||||||||||
2009 | 600,001 | 0 | 1,576,450 | 912,554 | 600,000 | 0 | 76,107 | 3,765,112 | ||||||||||||||||||||||||||||
Linda A. Mills (8) |
2011 | 770,233 | 0 | 2,115,147 | 804,818 | 1,150,000 | 2,434,630 | 230,588 | 7,505,416 | |||||||||||||||||||||||||||
Corporate Vice President and President, Information Systems |
2010 | 721,154 | 0 | 2,208,350 | 1,400,034 | 900,000 | 1,551,922 | 265,335 | 7,046,795 |
(1) | This column includes amounts that were deferred under the savings and nonqualified deferred compensation plans. |
(2) | Pursuant to his March 12, 2007 offer letter, Mr. Palmer received a signing bonus of $700,000 in three installments ($233,333) each in 2007, 2008 and 2009. Mr. Palmer also received a recognition bonus for the spin-off of our former shipbuilding business in 2011. |
(3) | The dollar value shown in these columns is equal to the total grant date fair value of RPSRs, RSRs, and options granted during 2011. For information on each grant, see the 2011 Grants of Plan-Based Awards table. For a discussion on valuation assumptions, see the discussion in Note 17 of the Companys 2011 Form 10-K for the fiscal year ended December 31, 2011, adjusted to exclude forfeitures. The maximum grant date value of 2011 RPSRs for each NEO, which assumes a 200% maximum payout, is listed below: |
¡Wesley G. Bush |
$ | 8,523,026 | ||
¡James F. Palmer |
$ | 2,130,757 | ||
¡Gary W. Ervin |
$ | 2,130,757 | ||
¡James F. Pitts |
$ | 2,130,757 | ||
¡Linda A. Mills |
$ | 1,917,667 |
(4) | These amounts were paid pursuant to the Companys annual cash bonus program. This column includes amounts that were deferred under the savings and nonqualified deferred compensation plans. |
(5) | The amounts in this column relate solely to the increased present value of the executives pension plan benefits (see the description of these plans under the Pension Benefits table). There were no above-market earnings in the nonqualified deferred compensation plans (see the description of these plans under the Nonqualified Deferred Compensation table). The amount accrued in each year differs from the amount accrued in other years due to an increase in the number of years of service and any increases or decreases in pay (salary and bonus). The amount reflected is also sensitive to changes in the interest rate used to determine the present value of the payments to be made over the life of the executive. Of the $5,276,169 change in pension value in 2011 for Mr. Bush, approximately $1,500,000 was due to the lower discount rate used in 2011, $3,000,000 was due to the increase in his pay, and $700,000 was due to an additional year of age and service. |
(6) | The 2011 amount listed in this column for Mr. Bush includes medical, dental, life and disability premiums ($51,616), Company contributions to Northrop Grumman defined contribution plans ($180,350), financial planning/income tax preparation ($22,850) and other perquisites including personal liability insurance and executive physicals for years 2009 through 2011 ($7,000). In addition, the Company incurred $2,228,016 in costs related to security protection for Mr. Bush. These costs included $250,882 attributable to personal travel, including travel expenses for family members accompanying Mr. Bush while on travel, on Company aircraft consistent with the Companys security program. |
46 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
COMPENSATION DISCUSSION AND ANALYSIS | SUMMARY COMPENSATION TABLE (continued)
|
The 2011 amount listed in this column for Mr. Palmer includes medical, dental, life and disability premiums ($39,500), Company contributions to Northrop Grumman defined contribution plans ($73,810), security costs and personal travel on Company aircraft, including travel expenses for family members accompanying Mr. Palmer while on travel ($33,229), relocation expenses ($750,000) and other perquisites including financial planning/income tax preparation, personal liability insurance and executive physicals for years 2009 through 2011 ($21,595).
The 2011 amount listed in this column for Mr. Ervin includes medical, dental, life and disability premiums ($39,500), Company contributions to Northrop Grumman defined contribution plans ($73,810), security costs and personal travel on Company aircraft, including travel expenses for family members accompanying Mr. Ervin while on travel ($69,379) and other perquisites including financial planning/income tax preparation, personal liability insurance and executive physicals for years 2009 through 2011 ($20,184).
The 2011 amount listed in this column for Mr. Pitts includes medical, dental, life and disability premiums ($50,606), Company contributions to Northrop Grumman defined contribution plans ($72,585), security costs and personal travel on Company aircraft, including travel expenses for family members accompanying Mr. Pitts while on travel ($36,796) and other perquisites including personal liability insurance and executive physicals for years 2009 through 2011 ($4,843).
The 2011 amount listed in this column for Ms. Mills includes medical, dental, life and disability premiums ($39,686), Company contributions to Northrop Grumman defined contribution plans ($66,809), security costs and personal travel on Company aircraft, including travel expenses for family members accompanying Ms. Mills while on travel ($103,158) and other perquisites including personal liability insurance, financial planning/income tax preparation and executive physicals for years 2010 and 2011 ($20,935).
Method for Calculating Personal Use of Company Aircraft Value
The following method was used to calculate the value of personal use of Company aircraft described in the paragraphs above. The Company calculates the incremental cost of each element, which includes trip-related crew hotels and meals, in-flight food and beverages, landing and ground handling fees, hourly maintenance contract costs, hangar or aircraft parking costs, fuel costs based on the average annual cost of fuel per mile flown, and other smaller variable costs. Fixed costs that would be incurred in any event to operate Company aircraft (e.g., aircraft purchase costs, maintenance not related to personal trips, and flight crew salaries) are not included. The amount related to the loss of tax deduction to the Company due to the personal use of corporate aircraft under the Internal Revenue Code is not included.
Method for Calculating Personal Security Costs
As discussed above under Security Arrangements, the Company provides certain NEOs with residential and personal security protection due to the nature of our business, which dictates certain security and personal safety requirements. The amounts reflected in the All Other Compensation column include expenses for residential and personal security that are treated as perquisites under relevant SEC guidance, even though the need for such expenses arises from the risks attendant with their positions with the Company. The Company calculates the cost of travel security coverage based on the hourly rates and overhead fees charged directly to the Company by the firms providing security personnel. If Company security personnel are used, their hourly rates are used to calculate the cost of coverage for each trip.
(7) | Due to the technical interaction of two pension plans, when calculated pursuant to SEC reporting rules, Mr. Pitts net accrual for 2009 was negative, which is reported as zero in the column entitled Change in Pension Value and Non-Qualified Deferred Compensation Earnings. |
(8) | Ms. Mills was not a named executive officer in 2009; therefore, data for 2009 are not applicable. |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT l 47
COMPENSATION DISCUSSION AND ANALYSIS | GRANTS OF PLAN-BASED AWARDS TABLE
|
2011 Grants of Plan-Based Awards
Estimated Future Payouts Under Non-Equity Incentive Plan Awards (1) |
Estimated Future Payouts Under Equity Incentive Plan Awards (2)(3) |
All
Other Stock Awards: Number of Shares of Stock or Units (2)(4) (#) |
All
Other Option Awards: Number of Securities Underlying Options (2)(5) (#) |
Exercise
or Base Price of Option Awards (2) ($/Sh) |
Grant
Date Fair Value of Stock and Option Awards (2)(6) |
|||||||||||||||||||||||||||||||||||||||||
Name &
Principal Position |
Grant Type | Grant Date | Threshold ($) |
Target ($) |
Maximum ($) |
Threshold (#) |
Target (#) |
Maximum (#) |
||||||||||||||||||||||||||||||||||||||
Wesley G. Bush |
Incentive Plan | 0 | 2,250,180 | 4,500,360 | ||||||||||||||||||||||||||||||||||||||||||
Chairman, Chief Executive Officer and President |
RPSR | 2/15/11 | 0 | 61,636 | 123,272 | 5,139,210 | ||||||||||||||||||||||||||||||||||||||||
RSR | 2/15/11 | 61,636 | 4,261,513 | |||||||||||||||||||||||||||||||||||||||||||
Options | 2/15/11 | 262,271 | 69.14 | 3,576,969 | ||||||||||||||||||||||||||||||||||||||||||
James F. Palmer |
Incentive Plan | 0 | 637,561 | 1,275,122 | ||||||||||||||||||||||||||||||||||||||||||
Corporate Vice President and Chief Financial Officer |
RPSR | 2/15/11 | 0 | 15,409 | 30,818 | 1,284,802 | ||||||||||||||||||||||||||||||||||||||||
RSR | 2/15/11 | 15,409 | 1,065,378 | |||||||||||||||||||||||||||||||||||||||||||
Options | 2/15/11 | 65,568 | 69.14 | 894,246 | ||||||||||||||||||||||||||||||||||||||||||
Gary W. Ervin |
Incentive Plan | 0 | 637,560 | 1,275,120 | ||||||||||||||||||||||||||||||||||||||||||
Corporate Vice President and President, Aerospace Systems |
RPSR | 2/15/11 | 0 | 15,409 | 30,818 | 1,284,802 | ||||||||||||||||||||||||||||||||||||||||
RSR | 2/15/11 | 15,409 | 1,065,378 | |||||||||||||||||||||||||||||||||||||||||||
RSR Retention | 2/15/11 | 18,491 | 1,278,468 | |||||||||||||||||||||||||||||||||||||||||||
Options | 2/15/11 | 65,568 | 69.14 | 894,246 | ||||||||||||||||||||||||||||||||||||||||||
James F. Pitts |
Incentive Plan | 0 | 637,561 | 1,275,122 | ||||||||||||||||||||||||||||||||||||||||||
Corporate Vice President and President, Electronic Systems |
RPSR | 2/15/11 | 0 | 15,409 | 30,818 | 1,284,802 | ||||||||||||||||||||||||||||||||||||||||
RSR | 2/15/11 | 15,409 | 1,065,378 | |||||||||||||||||||||||||||||||||||||||||||
Options | 2/15/11 | 65,568 | 69.14 | 894,246 | ||||||||||||||||||||||||||||||||||||||||||
Linda A. Mills |
Incentive Plan | 0 | 581,288 | 1,162,575 | ||||||||||||||||||||||||||||||||||||||||||
Corporate Vice President and President, Information Systems |
RPSR | 2/15/11 | 0 | 13,868 | 27,736 | 1,156,314 | ||||||||||||||||||||||||||||||||||||||||
RSR | 2/15/11 | 13,868 | 958,834 | |||||||||||||||||||||||||||||||||||||||||||
Options | 2/15/11 | 59,011 | 69.14 | 804,818 | ||||||||||||||||||||||||||||||||||||||||||
(1) | Amounts in these columns show the range of payouts that were possible under the Companys annual cash bonus program. The actual bonuses are shown in the Summary Compensation Table column entitled Non-Equity Incentive Plan Compensation. |
(2) | The number of shares and exercise prices reported in this table reflect the terms of the awards and the value of the awards on the date they were granted and do not reflect subsequent adjustments that were made pursuant to the terms of the 2001 Long-Term Incentive Stock Plan and the awards to reflect the effect of the subsequent spin-off of our shipbuilding business. For additional information on the effect of such adjustments, see the Outstanding Equity Awards at 2011 Fiscal Year End below. |
(3) | These amounts relate to RPSRs granted in 2011 under the 2001 Long-Term Incentive Stock Plan. Each RPSR represents the right to receive a share of the Companys common stock upon vesting of the RPSR. The RPSRs may be earned based on relative Total Shareholder Return over a three-year performance period commencing January 1, 2011 and ending December 31, 2013. The payout will occur in early 2014 and may range from 0% to 200% of the rights awarded. Earned RPSRs may be paid in shares, cash or a combination of shares and cash. An executive must remain employed through the performance period to earn an award, although pro-rata vesting results if employment terminates earlier due to retirement, death or disability. See the Severance section for treatment of RPSRs in these situations and upon a change in control. |
(4) | These amounts relate to RSRs granted in 2011 under the 2001 Long-Term Incentive Stock Plan. Each RSR represents the right to receive a share of the Companys common stock upon vesting of the RSR. An executive must remain employed through a vesting period to earn an award, although full vesting results from death, disability, qualifying termination or mandatory retirement. The award is prorated if the executive terminates due to early retirement. Earned RSRs may be paid in either shares or cash. Mr. Ervin also holds RSRs that require employment through a vesting period to earn the award (100% after four years, although full vesting results from death or disability). See the Severance section for treatment of RSRs in these situations and upon a change in control. |
(5) | These amounts relate to non-qualified stock options granted in 2011 under the 2001 Long-Term Incentive Stock Plan. The exercise price for the stock options equals the closing price of the Companys common stock on the date of grant. Stock options vest in one-third installments on the first three anniversaries of the grant date and become fully vested after three years. The stock options expire seven years from the date of the grant. The stock options may also vest upon a change in control under certain circumstances, and a portion of the stock options may vest upon termination due to retirement, death or disability. See the Severance section for more information about these situations. |
(6) | For assumptions used in calculating the grant date fair value per share, see the discussion in Note 17 of the Companys 2011 Form 10-K for the fiscal year ended December 31, 2011, adjusted to exclude forfeitures. |
48 l NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2012 PROXY STATEMENT
COMPENSATION DISCUSSION AND ANALYSIS | OUTSTANDING EQUITY AWARDS TABLE
|
Outstanding Equity Awards at 2011 Fiscal Year End
Option Awards (5) | Stock Awards (5) | |||||||||||||||||||||||||||||||||||||||
Name &
Principal Position |
Number
of Securities Underlying Unexercised Options (#) Exercisable (1) |
Number
of Securities Underlying Unexercised Options (#) Unexercisable (1) |
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned (#) |
Grant Date |
Option Exercise Price ($) |
Options Expiration Date |
Number of Shares or Units of Stock that Have Not Vested (2) (#) |
Market Value of Shares or Units of Stock that Have Not Vested (3) ($) |
Equity Incentive (#) |
Equity Incentive ($) |
||||||||||||||||||||||||||||||
Wesley G. Bush |
0 | 286,862 | 0 | 2/15/11 | 63.22 | 2/15/18 | 67,415 | 3,942,429 | 67,415 | 3,942,429 | ||||||||||||||||||||||||||||||
Chairman, Chief Executive Officer and President |
168,986 | 337,973 | 0 | 2/16/10 | 54.46 | 2/16/17 | 0 | 0 | 119,931 | 7,013,565 | ||||||||||||||||||||||||||||||
59,641 | 119,282 | 0 | 2/16/10 | 54.46 | 2/16/17 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
239,972 | 119,986 | 0 | 2/17/09 | 41.14 | 2/17/16 | 0 | 0 | 62,618 | 3,661,901 | |||||||||||||||||||||||||||||||
183,150 | 0 | 0 | 2/27/08 | 73.90 | 2/27/15 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
70,000 | 0 | 0 | 2/28/07 | 65.70 | 2/28/17 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
59,063 | 0 | 0 | 2/15/06 | 59.52 | 2/15/16 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
49,219 | 0 | 0 | 6/14/04 | 47.99 | 6/14/14 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
43,750 | 0 | 0 | 8/20/03 | 43.08 | 8/20/13 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
James F. Palmer |
0 | 71,715 | 0 | 2/15/11 | 63.22 | 2/15/18 | 16,853 | 985,563 | 16,853 | 985,563 | ||||||||||||||||||||||||||||||
Corporate Vice Financial Officer |
0 | 283,066 | 0 | 2/16/10 | 54.46 | 2/16/17 | 45,938 | 2,686,454 | 34,562 | 2,021,186 | ||||||||||||||||||||||||||||||
48,708 | 97,418 | 0 | 2/16/10 | 54.46 | 2/16/17 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
117,432 | 58,718 | 0 | 2/17/09 | 41.14 | 2/17/16 | 0 | 0 | 30,625 | 1,790,950 | |||||||||||||||||||||||||||||||
89,524 | 0 | 2/27/08 | 73.90 | 2/27/15 | ||||||||||||||||||||||||||||||||||||
43,750 | 0 | 0 | 3/12/07 | 67.50 | 3/12/17 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
Gary W. Ervin |
0 | 71,715 | 0 | 2/15/11 | 63.22 | 2/15/18 | 16,853 | 985,563 | 16,853 | 985,563 | ||||||||||||||||||||||||||||||
Corporate Vice President and President, Aerospace Systems |
2/15/11 | 20,224 | 1,182,700 | 0 | 0 | |||||||||||||||||||||||||||||||||||
48,708 | 97,418 | 0 | 2/16/10 | 54.46 | 2/16/17 | 0 | 0 | 34,562 | 2,021,186 | |||||||||||||||||||||||||||||||
46,911 | 45,958 | 0 | 2/17/09 | 41.14 | 2/17/16 | 0 | 0 | 23,953 | 1,400,771 | |||||||||||||||||||||||||||||||
56,985 | 0 | 0 | 2/27/08 | 73.90 | 2/27/15 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
16,406 | 0 | 0 | 9/19/07 | 73.02 | 9/19/17 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
13,125 | 0 | 0 | 6/14/04 | 47.99 | 6/14/14 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
13,125 | 0 | 0 | 8/20/02 | 52.48 | 8/20/12 | |||||||||||||||||||||||||||||||||||
James F. Pitts |
0 | 71,715 | 0 | 2/15/11 | 63.22 | 2/15/18 | 16,853 | 985,563 | 16,853 | 985,563 | ||||||||||||||||||||||||||||||
Corporate Vice President and President, Electronic Systems |
48,708 | 97,418 | 0 | 2/16/10 | 54.46 | 2/16/17 | 0 | 0 | 34,562 | 2,021,186 | ||||||||||||||||||||||||||||||
91,911 | 45,958 | 0 | 2/17/09 | 41.14 | 2/17/16 | 0 | 0 | 23,953 | 1,400,771 | |||||||||||||||||||||||||||||||
73,282 | 0 | 0 | 2/27/08 | 73.90 | 2/27/15 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
39,375 | 0 | 0 | 2/28/07 | 65.70 | 2/28/17 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
43,750 | 0 | 0 | 2/15/06 | 59.52 | 2/15/16 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
13,125 | 0 | 0 | 10/1/05 | 49.70 | 10/1/15 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
19,687 | 0 | 0 | 6/14/04 | 47.99 | 6/14/14 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
16,406 | 0 | 0 | 8/20/02 | 52.48 | 8/20/12 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
Linda A. Mills |
0 | 64,544 | 0 | 2/15/11 | 63.22 | 2/15/18 | 15,168 | 887,025 | 15,168 | 887,025 | ||||||||||||||||||||||||||||||
Corporate Vice President and President, Information Systems |
44,734 | 89,470 | 0 | 2/16/10 | 54.46 | 2/16/17 | 0 | 0 | 31,719 | 1,854,927 | ||||||||||||||||||||||||||||||
91,911 | 45,958 | 0 | 2/17/09 | 41.14 | 2/17/16 | 0 | 0 | 23,953 | 1,400,771 | |||||||||||||||||||||||||||||||
48,836 | 0 | 0 | 2/27/08 | 73.90 | 2/27/15 | 0 | 0 | 0 | 0 |
(1) | Options awarded through 2007 vested at a rate of 25% per year on the grants anniversary date over the first four years of the ten-year option term. Options awarded after 2007 vest at a rate of 33 1/3% per year on the grants anniversary date over the first three years of the seven-year option term. Mr. Palmers 2010 retention award of 283,066 options will vest at a rate of 50% three years from date of grant and 50% four years from date of grant, with a seven-year option term. |
(2) | Outstanding RSRs vest as follows: Mr. Palmers outstanding retention grant of 45,938 shares will vest on February 16, 2014. All other RSRs will fully vest four years from date of grant on February 15, 2015. |
(3) | Based on the closing price of the Companys stock of $58.48 on December 30, 2011, the last trading day of the year. |
(4) | These are target numbers for RPSRs. The 2011 RPSR award for each NEO vests based on performance for the three-year cycle ending on December 31, 2013, the 2010 RPSR award vests based on performance for the three-year cycle ending on December 31, 2012, and the 2009 RPSR award vests based on performance for three-year cycle ending on December 31, 2011. |
(5) | Number of shares subject to options and stock awards and option exercise prices reflect adjustments pursuant to the terms of the applicable plans and awards to reflect the spin-off of our former shipbuilding business on March 31, 2011. Equity awards outstanding, whether vested or unvested at the time of spin-off, were converted using a factor of 1.09376 times the quantity granted. Option exercise prices were converted using the inverse of the factor. The awards retained the original terms and conditions after conversion. |