| 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 and regulations. Ms. Kleiner's training as a lawyer combined with the experience
6INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENT
| | PROPOSAL ONE:● Expertise in corporate governance, implementation of Sarbanes-Oxley controls, risk management, securities transactions and mergers and acquisitions
| ELECTION OF DIRECTORS● Significant experience from past roles as general counsel for two public companies, outside counsel to numerous public companies and through service on another public company board
| ● Audit committee financial expert |
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.
| | | | | KARL J. KRAPEK, 65 | | | KARL J. KRAPEK, 64
Former President and Chief Operating Officer, United Technologies Corporation, an aerospace and building systems company. Director since 2008 Member of the Compensation Committee and Governance Committee (Chair) | | | | Mr. Karl J. Krapek served as President and Chief Operating Officer of United Technologies Corporation from 1999 until his retirement 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 a director of Prudential Financial, Inc. He was also a director of The Connecticut Bank and Trust Company and Visteon Corporation during the past five years.
| | Attributes, Skills and Qualifications | ● Extensive industry experience and leadership skills | ● Deep operational experience in aerospace and defense, domestic and international business operations and technology and lean manufacturing | ● Significant public company board experience |
Mr. Karl J. Krapek served as President and Chief Operating Officer
6INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
Table of United Technologies Corporation from 1999 until his retirement 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 a director of Prudential Financial, Inc. He was a director of Delta Airlines Inc., Alcatel Lucent, The Connecticut Bank and Trust Company and Visteon Corporation during the past five years.Contents
Key Attributes, Skills and Qualifications | | PROPOSAL ONE: ELECTION OF DIRECTORS |
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. Mr. Krapek serves as Chairperson of the Governance Committee.
| | | | | RICHARD B. MYERS, 72 | | | RICHARD B. MYERS, 71
General, United States Air Force (Ret.) and Former Chairman of the Joint Chiefs of Staff. Director since 2006 Member of the Compensation Committee and Policy Committee | | | | General Richard B. Myers retired from his position as the fifteenth Chairman of the Joint Chiefs of Staff, the U.S. military's 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 and is Chairman of the Board of Governors of the USO. He is also 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. | | Attributes, Skills and Qualifications | ● Extensive career as a senior military officer and Chairman of the Joint Chiefs of Staff, having held leadership positions at the highest levels of the United States armed forces | ● Leading expert on national security and global geo-political issues | ● Extensive experience with Department of Defense operations and requirements and in-depth knowledge on issues related to the intelligence community |
General Richard B. Myers retired from his position as the fifteenth Chairman of the Joint Chiefs of Staff, the U.S. military's 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 and is Chairman of the Board of Governors of the USO. He is also 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 QualificationsDuring 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 operations and requirements and also 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. | | | | | GARY ROUGHEAD, 62 | | | Admiral, United States Navy (Ret.) and Former Chief of Naval Operations. Director since 2012 Member of the Audit Committee and Policy Committee | | | | | 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 Navy's 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 the Dodge & Cox Funds, the Darden School of Business Foundation, CNA, a not-for-profit research and analysis organization, and the Woods Hole Oceanographic Institution. | | Attributes, Skills and Qualifications | ● Extensive career as a senior military officer with the United States Navy, including numerous operational commands, as well as leadership positions, most recently as the 29th Chief of Naval Operations | ● Significant expertise in national security, information warfare, cyber operations and global security issues | ● Broad experience in leadership and matters of global relations |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT I 7
| | PROPOSAL ONE: ELECTION OF DIRECTORS |
| | | | | | AULANA L. PETERS, 71
Former Partner, Gibson, Dunn & Crutcher, a law firm.
Director since 1992
Member of the Audit Committee and Governance Committee
|
Ms. Aulana L. Peters is a former partner of the law firm of Gibson, Dunn & Crutcher where she was a partner from 1980 to 1984 and 1988 to 2000, when she retired. From 1984 to 1988, she served as a Commissioner of the SEC. 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 Board's Panel on Audit Effectiveness. Currently, Ms. Peters serves on the U.S. Comptroller General's Accountability Advisory Council, the Advisory Council to the Public Company Accounting Oversight Board ("PCAOB") and the Board of Trustees of the 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 company 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, the Advisory Council to the PCAOB 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 and regulations.
| | | THOMAS M. SCHOEWE, 61 | | | GARY ROUGHEAD, 61
Admiral, United States Navy (Ret.) and Former Chief of Naval Operations.
Director since 2012
Member of the Audit Committee and Policy Committee
|
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 Navy's 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 the Darden School of Business Foundation, 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, cyber operations and emerging national security issues. He also brings to the Board of Directors experience in leadership, crisis management and fiscal and procurement matters.
8INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENT
| | PROPOSAL ONE:
ELECTION OF DIRECTORS
|
| | | | | | THOMAS M. SCHOEWE, 60
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 2011. Prior to his employment with Wal-Mart, he held several roles at the Black and Decker Corporation, including 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 and Kohlberg Kravis Roberts and Company. He also served as a director of PulteGroup Inc. during the last five years.
| | Attributes, Skills and Qualifications | ● Extensive financial experience 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 | ● Significant international experience through his service as an executive of large public companies with substantial international operations | ● Extensive experience as a member of the audit committee of other public companies; audit committee financial expert |
Mr. Thomas M. Schoewe was Executive Vice President and Chief Financial Officer of Wal-Mart Stores Inc. from 2000 to 2011. Prior to his employment with Wal-Mart, he held several roles at the Black and Decker Corporation, including 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 and Kohlberg Kravis Roberts and Company. He served as a director of PulteGroup Inc. during the last five years.
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 regulations, and brings to the Board of Directors 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.
| | | | | KEVIN W. SHARER, 66 | | | KEVIN W. SHARER, 65
Senior Lecturer at Harvard Business School and Former Chairman and Chief Executive Officer, Amgen Inc., a biotechnology company. Director since 2003 Member of the Compensation Committee (Chair) and Governance Committee | | | | | Mr. Kevin W. Sharer has served as a Senior Lecturer at Harvard Business School since 2012. He served as Chairman of the Board of Directors of Amgen from January 2001 to December 2012. From May 2000 to May 2012, he served as Amgen's Chief Executive Officer. Mr. Sharer joined Amgen in 1992 as President, Chief Operating Officer and a member of its 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. | | Attributes, Skills and Qualifications | ● Significant business expertise as the former Chief Executive Officer and Chairman of a large public company | ● Extensive understanding of issues of corporate strategy and corporate leadership | ● Defense industry insight as a former officer in the U.S. Navy |
Mr. Kevin W. Sharer served as Chairman of the Board of Directors of Amgen from January 2001 to December 2012. From May 2000 to May 2012, he served as Amgen's Chief Executive Officer. Mr. Sharer joined Amgen in 1992 as President, Chief Operating Officer and a member of its 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. Mr. Sharer is currently a Senior Lecturer at Harvard Business School.
Key Attributes, Skills and Qualifications
Mr. Sharer's position as the former Chief Executive Officer of a large public company has enabled him to develop significant expertise in strategy, marketing, leadership development, 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. Mr. Sharer serves as Chairperson of the Compensation Committee.
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 TWELVE | | | | | | | THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE 11 NOMINEES FOR DIRECTOR LISTED ABOVE. |
8INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENTI 9
The following sections provide an overview of our corporate governance policies and procedures and include a description of the role of the Board of Directors, our director nomination process and the independence criteria we use in selecting directors, among other items. | | | | | | We are committed to high standards of corporate governance, consistent with our core values of sustainable performance, ethics and compliance. With strong oversight from the Board, our corporate governance regime is intended to promote the long-term success of our Company to benefit our shareholders, customers and employees.
| Our Board has adopted Principles of Corporate Governance and Standards of Business Conduct to help guide and promote our good corporate governance and responsible business practices. |
The primary responsibility of the Board of Directors is to foster our long-term success representing the interests of our shareholders. We believe that strong ethical behavior is essential to achieve top performance. The Board of Directors has adopted Principles of Corporate Governance and Standards of Business Conduct that reinforce our values and strong commitment to ethics and integrity, promoting responsible business practices and good corporate citizenship.
TheOur Principles of Corporate Governance outline the role and responsibilities of our Board, of Directors, set forth additional independence requirements for our directors and provide guidelines for Board leadership and Board and committee membership, among other items. Further to align our directors' interests with those of our shareholders, our Principles of Corporate Governance require our directors to have a direct and material investment in our common stock. The Board of Directors reviews these principles at least annually and considers opportunities for improvement and modification based on changed circumstances.modification.
Our Standards of Business Conduct apply to our Board of Directors,directors, officers and all employees. The Standards of Business Conduct support our commitment to the highestAmong other things, they: require high ethical standards of ethics and integrity in all aspects of our business. The Standards of Business Conduct business; require ethical conduct in our relationships with customersstrict adherence to all applicable laws and suppliers, regulations; reinforce the need for avoiding actual or apparent conflicts of interest and require the responsible use of Company resources. The Standardsresources; and call upon all employees freely to seek guidance regarding business conduct and to raise any issues of Business Conduct require strict adherence to all laws and regulations applicable to the conduct of our domestic and international businesses. As part of our commitment to ethics and integrity, our Standards of Business Conduct encourage open communication with Company ethics officers (which may be doneconcern (including on an anonymous basis) if an employee seeks guidance regarding business conduct or suspects an actual or apparent violation.
The primary responsibility of our Board is to foster the long-term success of the Standards of Business Conduct in good faith. Role ofCompany, promoting the Board and Director Responsibility and Oversight
Our day-to-day business and affairs are conducted by our employees and officers, under the directioninterests of our Chairman and Chief Executive Officer and with the oversight of the Board of Directors. In discharging their oversight duties, the Board of Directors regularly consults with management. Directors also communicate freely amongst themselves both at and apart from formal meetings.
In fulfilling their decision-making and oversight responsibilities,shareholders. Our directors exercise their business judgment in a manner they reasonably believe to be in the best interests
of the Company and our shareholders and in a manner consistent with their fiduciary responsibilities. The decision-making responsibilities of the Board of Directors include, but are not limited to, the following: | | ▪ | electing directors to fill vacant positions between Annual Meetings and evaluating offers of resignation from directors; |
| | ▪ | selectingoversee our long-term business strategies, operations and performance; select the Chief Executive Officer and electing officers of the Company; |
| | ▪
| reviewing and approving executive compensation; |
| | ▪
| reviewing and approving significant corporate actions; |
| | ▪ | determining proposals for shareholder vote and responses to shareholder proposals; and |
| | ▪ | approving revisions to our Bylaws. |
The Board of Directors' general oversight responsibilities include, but are not limited to, the following:
| | ▪ | oversee our long-term business strategies; |
| | ▪ | overseeour operations and performance;
|
| | ▪ | oversee major risk factors and risk management activities; |
| | ▪ | oversee senior executive succession planning; |
| | ▪ | oversee and evaluate management and Board performance; |
| | ▪ | oversee our ethics and compliance programs; and |
| | ▪ | provide advice and counsel to management. |
Board Leadership
Chairperson of the Board
Our Bylaws establish the position of Chairperson of the Board. The Chairperson of the Board will generally be either an independent director or the Chief Executive Officer. The Chairperson interacts directly with all members of the Board and assists the Board to fulfill its responsibilities.
In July 2011, Mr. Bush, our Chief Executive Officer and President, was elected by the Board of Directors to serve as its Chairman. He succeeded Mr. Lewis W. Coleman who had served as our independent Chairman. The Board of Directors believes that it is in the best interestselect officers of the CompanyCompany;
oversee our risk management activities; oversee senior executive succession planning; elect directors to fill vacant positions between Annual Meetings; review and our shareholders to have flexibility in determining the most effective leadership structure to serve the interests of the Companyapprove executive compensation; review and our shareholders.approve significant corporate actions; Our Governance Committeeoversee and our Board of Directors considered a number of factors to determine who should serve as Chairperson of the Board, including the experience andevaluate management responsibilities that Mr. Bush has as both Chief Executive Officer and President, the current environment and what will best serve the interests of the Company and our shareholders at this time. The Board
10INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENT
concluded that having the CEO also serve as Chairperson best positions the Company to be innovative, compete successfully and advance shareholder interests in today's changing environment. As discussed further below, the Board of Directors designated a Lead Independent Director, consistent with its continuing commitment to strong corporate governance and Board independence.performance;
Lead Independent Directoroversee our ethics and compliance programs; and
Our Principles of Corporate Governance provide that if at any time the Chairperson of the Board is not independent, the independent directors will designate from among them a Lead Independent Director. Following our 2012 Annual Meeting, the independent directors designated Mr. Felsinger as Lead Independent Director replacing Mr. Lewis W. Coleman, who had served in that role since July 2011.advice to management.
Our Principles of Corporate Governance set forth specific duties and responsibilities of the Lead Independent Director. Among these duties, he:
| | ▪
| presides at meetings of the Board of Directors at which the Chairperson of the Board of Directors is not present, including executive sessions of the independent directors, and advises the Chairperson of the Board and CEO on decisions reached; |
| | ▪
| advises the Chairperson of the Board of Directors on and approves meeting agendas and the information sent to the Board of Directors; |
| | ▪
| advises the Chairperson of the Board of Directors and approves the schedule of Board of Directors meetings to assure that there is sufficient time for discussion of all agenda items; |
| | ▪
| provides the Chairperson of the Board of Directors with input as to the preparation of the agendas of the Board of Directors and committee meetings, taking into account the requests of the other committee and Board members; |
| | ▪
| interviews, along with the Chairperson of the Board of Directors and the Chairperson of the Governance Committee, all candidates for the Board of Directors and makes recommendations to the Governance Committee and the Board of Directors; |
| | ▪
| has the authority to call meetings of the independent directors; |
| | ▪
| serves as liaison between the Chairperson of the Board of Directors and the independent directors; and |
| | ▪
| if requested by major shareholders, ensures that he is available for consultation and direct communication. |
If the Board of Directors elects an independent Chairperson rather than designating a Lead Independent Director, the duties and responsibilities of the independent Chairperson are as set forth in the Company's Principles of Corporate Governance.
Board's Role in Risk Oversight TheAs noted above, the Board of Directors as a whole is responsible for overseeing our risk oversight.management activities, among other duties. The Audit Committee assists the Board of Directors in this role by reviewing and reporting to the fullrole. The Board of Directors on our guidelines and policies with respect to risk assessment and risk management, including insurance risk management, major financial risk exposures and the stepsAudit Committee actively oversee the management of risks that management has taken to monitorcould impact our performance, including assessing and control such exposures.analyzing likely areas of future risk for our Company. The Audit Committee annually receives a report from the Chief Financial Officer addressing our risk management processes and systems, the nature of the material risks the Company faces and how the Company responds to and mitigates these risks. TheAt least annually, the Audit Committee receives periodic reportsa report from our General Counsel on legal risks and hearshow the Company is addressing and mitigating those risks. The Audit Committee also receives an annual report from our Chief Compliance Officer on the Company's compliance program.program overall.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENTI 9
| | | Board Leadership Structure |
The Board believes that it is in the best interests of the Company and our shareholders to have flexibility in determining the most effective leadership structure to serve the interests of the Company and our shareholders.
Chairperson of the Board Our risk management structureBylaws provide that our directors will designate a Chairperson of the Board from among its members. The Chairperson presides at all Board and shareholder meetings. The Chairperson interacts directly with all members of the Board and assists the Board to fulfill its responsibilities. Mr. Bush, our Chief Executive Officer and President, has served as Chairman since July 2011.
Lead Independent Director If the Chairperson is not independent, the independent directors will designate from among them a Lead Independent Director. Following our 2013 Annual Meeting, the independent directors designated Mr. Felsinger as Lead Independent Director. Our Principles of Corporate Governance set forth specific duties and responsibilities of the Lead Independent Director, which include the following: preside at meetings of the Board at which the Chairperson is not present, including executive sessions of the independent directors, and advise the Chairperson and CEO on decisions reached; advise the Chairperson on and approve meeting agendas and the information sent to the Board; advise the Chairperson on and approve the schedule of Board meetings to assure there is sufficient time for discussion of all agenda items; provide the Chairperson with input as to the preparation of Board and committee meeting agendas, taking into account the requests of the other Board and committee members; interview, along with the Chairperson and the Chairperson of the Governance Committee, Board candidates and make recommendations to the Governance Committee and the Board; has the authority to call meetings of the independent directors; serve as liaison between the Chairperson and the independent directors; and if requested by major shareholders, ensure that he is available for consultation and direct communication. If the Board elects an independent Chairperson rather than designating a Lead Independent Director, the duties and responsibilities of the independent Chairperson are also includesas set forth in our Principles of Corporate Governance. 10INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
| | | Committees of the Board of Directors |
The Board has four standing committees: the Audit Committee, the Compensation Committee, the Governance Committee and the Policy Committee. The membership of these committees is typically determined at the organizational meeting of the Board held in conjunction with the Annual Meeting. All the committees are composed entirely of independent directors. The primary responsibilities of each of the committees are summarized below, together with a table listing the membership and chairperson of each committee as of December 31, 2013. The charters for each standing committee can be found on the Investor Relations section of our website (www.northropgrumman.com). | | | | Audit Committee | | Roles and Responsibilities | 2013 Committee Members | | Assist the Board in its oversight of (1) the integrity of the Company's financial statements and the Company's accounting and financial reporting processes; (2) the Company's overall compliance with legal and regulatory requirements; (3) the qualifications, performance and independence of the Company's independent auditor, (4) the performance of the Company's internal audit function; and (5) the Company's system of disclosure controls and procedures and internal control over financial reporting, by: | Stephen E. Frank (chair)* Victor H. Fazio William H. Hernandez Madeleine A. Kleiner Aulana L. Peters Gary Roughead Thomas M. Schoewe
Number of meetings in 2013: 10
Independence, Financial Literacy and Audit Committee Financial Experts
All members are independent and financially literate
Ms. Kleiner and Peters and Messrs. Frank, Hernandez, and Schoewe each qualifies as an Audit Committee Financial Expert
*The Board named Mr. Hernandez as chairperson effective February 20, 2014. | ● appointing, retaining, overseeing, evaluating and terminating, if necessary, the independent auditor | ● reviewing and pre-approving audit and non-audit services and related fees for the independent auditor | ●reviewing and discussing the Company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q | ● reviewing and discussing management's assessment of, and report on, the effectiveness of the Company's internal control over financial reporting at least annually and the independent auditor's related report | ● reviewing with the General Counsel, at least annually, the status of significant pending litigation and various other significant legal, compliance or regulatory matters | ●reviewing with the Chief Compliance Officer, at least annually, the Company's compliance program | ● discussing guidelines and policies regarding risk assessment and risk management | ● reviewing any significant issues raised by the internal audit function and, as appropriate, management's actions for remediation | ● establishing and periodically reviewing and discussing with management the Company's procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters |
| | | | Compensation Committee | | Roles and Responsibilities | 2013 Committee Members | | Assist the Board in overseeing the Company's compensation policies and practices by: | Kevin W. Sharer (chair) Donald E. Felsinger Bruce S. Gordon Karl J. Krapek Richard B. Myers
Number of meetings in 2013: 6
Independence
All members are independent | ● approving the compensation for elected officers (other than the Chief Executive Officer, whose compensation is recommended by the Committee and approved by all the independent directors) | ● establishing stock ownership guidelines and reviewing ownership levels on an annual basis | ● administering incentive and equity compensation plans and approving payments or grants under these plans for elected officers (other than the Chief Executive Officer) | ● approving compensation for the independent directors | ● producing an annual report on executive compensation for inclusion in the proxy statement | ● providing support to the Board in carrying out its overall responsibilities related to executive compensation |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENTI 11
| | | | Governance Committee | | Roles and Responsibilities | 2013 Committee Members | | Assist the Board in overseeing the Company's corporate governance practices by: | Karl J. Krapek (chair) Donald E. Felsinger Madeleine A. Kleiner Aulana L. Peters Kevin W. Sharer
Number of meetings in 2013: 5
Independence
All members are independent
| ● regularly reviewing the Company's corporate governance policies and practices, including the Principles of Corporate Governance, and recommending changes to the Board | ● reviewing and making recommendations to the Board regarding the composition and size of the Board | ● reviewing and making recommendations to the Board regarding the criteria for Board membership, which should include among other things, diversity, experience and integrity | ● identifying and recommending to the Board qualified potential candidates to serve on the Board and its committees | ● coordinating the process for the Board to evaluate its performance |
| | | | Policy Committee | | Roles and responsibilities | 2013 Committee Members | | Assist the Board in overseeing policy, government relations, corporate responsibility and other matters by: | Bruce S. Gordon (chair) Victor H. Fazio Stephen E. Frank William H. Hernandez Richard B. Myers Gary Roughead Thomas M. Schoewe
Number of meetings in 2013: 4
Independence
All members are independent | ●identifying and evaluating global security, budgetary and other issues and trends that could impact the Company's business activities and performance | ● reviewing and providing oversight over the Company's ethics and corporate responsibility policies and programs | ● reviewing the Company's public relations and advertising strategy | ● reviewing and monitoring the Company's government relations strategy and political action committee | ● reviewing the Company's community relations activities | ● reviewing and providing oversight of the Company's environmental sustainability program |
| | | Board Meetings and Executive Sessions |
The Board meets no less than on a quarterly basis. Special meetings of the Board may be called from time to time as appropriate. On an ongoing effortannual basis, the Board holds an extended meeting to assessreview our long-term strategy. The Board holds its meetings at Company locations other than our corporate headquarters on a regular basis to provide the directors with a first-hand view of different elements of our business and analyzean opportunity to interact with local management. The Board meets in executive session (with the most likely areasdirectors only and then with the independent directors only) following each in-person Board meeting and on other occasions as needed. The non-executive Chairperson or the Lead Independent Director presides over the executive sessions of future risk for our Company.the independent directors. The Audit Committee periodically reportsmeets in executive session at each in-person Audit Committee meeting, and regularly requests separate executive sessions with representatives of our independent registered public accounting firm and our senior management, including our Chief Financial Officer, General Counsel and our Vice President, Internal Audit. The Compensation Committee also meets in executive session on a regular basis and may request the Compensation Committee's compensation consultant report to the Compensation Committee in executive session. The Governance and Policy Committees also meet in executive session as they deem necessary.
12INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
During 2013, the Board held ten meetings. Each director serving in 2013 attended 75% or more of Directors on matters concerning risk management, including the significant risks our Company facestotal number of Board and committee meetings he or she was eligible to attend. Board members are expected to attend the processes, policies and procedures we employAnnual Meeting, except where the failure to monitor and control such risks.attend is due to unavoidable circumstances. All directors that were members of the Board in May 2013 attended the 2013 Annual Meeting.
The Board of Directors has established an objective that at least 75% of our directors be independent directors. The Board of Directorsand Governance Committee annually determinesreview the independence ofrelevant relationships or arrangements between the Company and our directors based on a review byor parties related to the directors and the Governance Committee.in determining whether such directors are independent. No director is considered independent unless the Board of Directors has determined that he or shethe director meets the independence requirements for independence under the applicable rules of the NYSE and the SEC rules and has no material relationship with our Company, either directly or as a partner, shareholder or officer of an organization that has a material relationship with our Company, other than as a director. Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others. Our Principles of Corporate Governance provide that a director may be deemed not to have a material relationship with ourthe Company if hethe director: has not within the prior three years been a director, executive officer or she:trustee of a charitable organization that received annual contributions from the Company exceeding the greater of $1 million or 2% of the charitable organization's annual gross revenues, where the gifts were not normal matching charitable gifts, did not go through normal corporate charitable donation approval processes or were made "on behalf of" a director; | | ▪ | has not, and has no immediate family member who has, within the prior three years been employed by, a partner in or otherwise affiliated with any law firm or investment bank in which the director's or the immediate family member's compensation was contingent on the services performed for the Company or in which the director or the immediate family member personally performed services for the prior three years been a director, executive officer or trustee of a charitable organization that received annual contributions from our Company exceeding the greater of $1 million, or 2% of the charitable organization's annual gross revenues, where the gifts were not normal matching charitable gifts, did not go through normal corporate charitable donation approval processes or were made "on behalf of" a director; |
| | ▪ | has not within the prior three years been employed by, a partner in or otherwise affiliated with any law firm or investment bank retained by the Company in which the director's compensation was contingent on the services performed for our Company or in which the director personally performed services for our |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENTI 11
Company and the annual fees we paid by the Company during the preceding fiscal year did not exceed the greater of $1 million or 2% of the gross annual revenues of such firm; and | | ▪ | has not within the prior three years owned, and has no immediate family member who owned, either directly or indirectly as a partner, shareholder or officer of another company, more than 5% of the equity of an organization that has a business relationship with (including significant purchasers of goods or services), or more than 5% ownership in, our Company. |
has not within the prior three years owned, and has no immediate family member who owned, either directly or indirectly as a partner, shareholder or officer of another company, more than 5% of the equity of an organization that has a material business relationship with (including significant purchasers of goods or services), or more than 5% ownership in, the Company.
2013 Independence Determination In Februaryconnection with its annual independence review for 2013, the Board of Directors and the Governance Committee reviewed directors' responses to a questionnaire asking about their and their immediate family members' relationships with our Company and other potential conflicts of interest, as well as material provided by management related to transactions, relationships or arrangements between our Company and the directors or parties related to the directors. The Board of Directors considered the following relationships with organizations to which we have made payments or contributions in the usual course of our business: | | ▪ | Mr. Felsinger's service as a member of the board of directors of Sempra Energy; |
| | ▪ | Mr. Fazio's service as a member of the board of directors of the Center for Strategic Budgetary Assessments; |
| | ▪ | General Myers' service as a member of the board of directors of Aon Corporation and United Technologies Corporation; and |
| | ▪ | Ms. Peters' service as a member of the board of directors of 3M Company. |
business. The amounts paid to these organizations were below the applicable thresholds under NYSE rules and our Principles of Corporate Governance,Governance. Mr. Fazio's service as a member of the board of directors of the Center for Strategic Budgetary Assessments; Mr. Felsinger's service as a member of the board of directors of Archer Daniels Midland; General Myers' service as a member of the board of directors of Aon Corporation; Mr. Hernandez's service as a member of the board of directors of Black Box Corporation; and Ms. Peters' service as a member of the Boardboard of Directors concluded that each individual had no other relationship with those entities other than their roles as directors (other than Mr. Felsinger who served as Executive Chairman of Sempra Energy). In addition, the Board considered that Mr. Sharer's daughter was employed by us until September 2012 in a non-executive position. Her compensation was below the threshold required for disclosure by the SEC, and the Board determined her prior employment did not interfere with Mr. Sharer's independence.3M Company. The Board of Directors also considered that Ms. Kleiner, General Myers, Ms. Peters, Admiral Roughead and Mr. Sharer serve as members of the boards of charitable and other non-profit organizations to which the Company and/or the Northrop Grumman Foundation (the "Foundation")(Foundation) made contributions during 20122013 in the usual course of our charitable contributions program. In some instances, these charitable contributions wereprogram, as well as in connection with our matching gifts program which(which limits the contributions to $10,000 per year per director. In no instance did our annual contributions to a charitable or non-profit entity in which a Board member serves as a director director).exceedFollowing its review and the greater of $1,000,000 or 2%recommendation of the charitable or non-profit organization's annual gross revenue, satisfying the independence standards described in our Principles of Corporate Governance.
The Governance Committee, determined that all 11 non-employee directors are independent, and all of the members of the Audit, Compensation, Governance and Policy Committees are independent. The Governance Committee reported its conclusion to the Board of Directors, and the Board of Directors then considered each director individually and, in applying the standards described above and considering the facts listed above concerning certain of the directors, determined that none of the 11 non-employee directors has had during the last three years any material relationship with our Company that would compromise his or her independence.
Accordingly, the Board of Directors affirmatively determined that all of the active directors, except Mr. Bush, our Chairman, Chief Executive Officer and President, are independent. The independent directors constituteserving during 2013 constituted approximately 92% of the members of our BoardBoard.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENTI 13
Our Bylaws and Certificate of Incorporation provide for the annual election of directors. Directors will hold office until their successors are elected and take office, they resign or they are otherwise removed. Generally, in order to be elected, a director must receive more votes cast for than against his or her election, unless one or more shareholders provide notice of an intention to nominate one or more candidates to compete with the Board's nominees for election. The BoardGovernance Committee carefully considers all director nominee candidates on the basis of Directors also affirmatively determined that Mr. Coleman was independent during his period of service in 2012, priorthe candidate's background, qualifications and experience, and recommends to his resignation from the Board of Directors on November 30, 2012. Director Nomination Process
the nominees for election. The Governance Committee identifies and evaluates director candidates and may employ a third-party search firm to assist in this process. Board members suggest director candidates to the Governance Committee. In addition, the Governance Committee will consider shareholder nominees if they have been nominated in accordance with our shareholder nominations process under our Bylaws. Any shareholder recommendation must be addressed to the Governance Committee in care of the Corporate Secretary. TheAs noted in our Principles of Corporate Governance, the Governance Committee will evaluate candidates recommended by shareholders in generally the same manner as all other candidates brought to the attention of the Governance Committee.
The Governance Committee carefully considers all candidates on the basis of the candidate's background and experience, consistent withis responsible for establishing the criteria set forth in the Principles of Corporate Governance, and recommends to thefor Board of Directors the nominees for election.membership. In making its selection,nominating directors, the Governance Committee bears in mind that the foremost responsibility of a director is to represent the interests of our shareholders as a whole. The activities and associations of candidates are reviewed for any legal impediment, conflict of interest or other consideration that might prevent or interfere with service on our Board of Directors. Board. In evaluating candidates, the Governance Committee considers considers: the personal integrity and the professional reputation of the individual, as well as individual; the education, professional background and particular skills and experience most beneficial to service on the Board of 12INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENT
Directors. The Governance Committee also considers whether a director candidate is willing to submit to and obtain a background check necessary for obtaining and retaining a top secret clearance and whether a director candidate has timely obtained such clearance.
As set forth in the Governance Committee Charter, the Governance Committee is responsible for establishing the criteria for Board membership. The Governance Committee includes diversity as a key criterion for board composition. While weWe do not have a formal policy outlining the diversity standards to be considered when evaluating director candidates, ourcandidates. Our objective is to foster diversity of thought on our Board of Directors.Board. To accomplish that objective, the Governance Committee seeks to achieve diversity including in race, gender and national origin, as well as in perspective, professional experience, education, skill and other qualities that contribute to our Board.
All new directors to the Board receive an orientation that is individually tailored, taking into account the director's experience, background, education and committee assignments. Directors may not serve on more than three other boards of Directors. Thepublicly traded companies in addition to our Board without the approval of the Chairperson of the Governance Committee. A director who is a full-time employee of our Company may not serve on the board of more than two other public companies unless approved by the Board. When a director's principal occupation or business association changes substantially during his or her tenure as a director, the Board expects the director to tender his or her resignation for consideration by the Governance Committee, considers diversity among other important criteria for board membership and regularly monitors the composition ofwhich subsequently will recommend to the Board of Directors with respectwhat action to diversity.take. We have established a number of programs and initiatives to help further diversity and inclusion throughout our Company. In accordance with our Bylaws and Certificate of Incorporation, directors are elected by the shareholders forretirement policy whereby a one-year term expiringdirector will retire at the next Annual Meeting following their election. Generally, in order to be elected or re-elected to the Board of Directors, a director nominee must receive more votes cast for rather than against his or her election or re-election72nd birthday, unless one or more shareholders provide notice of an intention to nominate one or more candidates to compete with the Board determines, based on special circumstances, that it is in the Company's best interest to request that the director serve for an extended period of Directors' nominees in a director election. Between Annual Meetings, the Board of Directors has the authority, under our Bylaws and Certificate of Incorporation, to fill any vacant positions.time beyond such date.
14INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
EffectFollowing the annual meeting at which the directors are elected, each | | | Effect of Failure to Receive the Required Vote or Obtain and Retain Security Clearance |
Each director is required to tender a resignation that will be effective upon (i) the failure to receive the required vote at any future meeting at which such director faces re-election, or the failure to obtain top secret security clearance within 12 months of electionappointment or appointmentelection to the Board of Directorsor the failure to retain a top secret security clearance once obtained and (ii) the Board of Directors'Board's acceptance of such resignation. If an incumbent director fails to receive the required vote for re-election or fails to obtain and retain a top secret security clearance, the Governance Committee will consider whether the Board of Directors should accept the director's resignation and will submit a recommendation for prompt consideration by the Board of Directors.Board. The Board of Directors expects the director whosewill decide whether to accept or reject a resignation is under consideration to abstain from participating in any decision regarding that resignation and will also request that all non-independent directors abstain from participating in the decision regarding the resignationwithin 90 days, unless the Board of Directors determines that the participation of one or more such directors is necessary under the circumstances.compelling circumstances require additional time. The Governance Committee and the Board of Directors may consider any factor they deem relevant in deciding whether to accept a resignation, including, without limitation, any harm to our Company that may result from accepting the resignation, the underlying reasons for the action at issue and whether action in lieu of accepting the resignation would address the underlying reasons.
The Board of Directors will decide whether to accept or reject a resignation within 90 days, unless the Board of Directors determines that compelling circumstances require additional time.
Board Membership
All new directors receive an orientation that is individually tailored, taking into account the director's experience, background, education and committee assignments. This orientation includes one-on-one meetings with senior management, written materials about our Company and our various products and operations and training on our key Company policies and procedures (including our Standards of Business Conduct) and duties and responsibilities under applicable law. We also maintain a list of continuing director education opportunities, and all directors are encouraged to periodically attend, at our expense, director continuing education programs offered by various organizations.
Directors may not serve on more than three other boards of publicly traded companies in addition to our Board of Directors without the approval of the Chairperson of the Governance Committee. A director who is a full-time employee of our Company may not serve on the board of more than two other public companies unless approved by the Board of Directors. When a director's principal occupation or business association changes substantially during his or her tenure as a director, the Board of Directors expects the director to tender his or her resignation for consideration by the Governance Committee, which subsequently will recommend to the Board of Directors the action, if any, to be taken with respect to the tender of resignation. We have a retirement policy whereby a director will retire at the Annual Meeting following his or her 72nd birthday, unless the Board of Directors determines, based on special circumstances, that it is in the Company's best interest to request that the director serve for an extended period of time beyond such date.
Board Meetings and Executive Sessions
Our Board of Directors meets no less than on a quarterly basis. Special meetings of the Board of Directors may be called from time to time as appropriate. On an annual basis, the Board of Directors holds an extended meeting to review our long-term strategy.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENTI 13
| | CORPORATE GOVERNANCEBoard Evaluation |
The Board of Directors holds its meetings at Company locations other than our corporate headquarters on a regular basis to provide the directors with a first-hand view of the business at that location and an opportunity to interact with local management.
The non-employee directors meet in an executive session of independent directors during each in-person Board of Directors meeting and on other occasions as needed. The non-executive Chairperson of the Board or the Lead Independent Director presides over these sessions. The Audit Committee meets in executive session at each in-person Audit Committee meeting, and regularly requests separate executive sessions with representatives of our independent registered public accounting firm and our senior management, including our Chief Financial Officer, General Counsel and our Vice President, Internal Audit. The Compensation Committee also meets in executive session at regular Compensation Committee meetings, and regularly requests the Compensation Committee's compensation consultant report to the Compensation Committee in executive session. The Governance and Policy Committees also meet in executive session as they deem necessary.
Evaluation and Succession Planning
Every year the Board and each of Directorsits Committees conducts an assessment of its performance and atdiscusses the conclusion ofresults and opportunities for improvement in executive session. In addition, the evaluation process discusses its results. The Board of Directors also considers the performancedirectors conduct an annual assessment of each individual director's performance. The Lead Independent Director discusses the results of this assessment with each director on a regular basis.individually.
The Board of Directors believes that providing for continuity of leadership is critical to the success of our Company. Therefore, processes are in place: annually to evaluate the Chief Executive Officer based on a specific set of performance objectives; for the Chief Executive Officer annually to provide an assessment of persons considered potential successors to various senior management positions and discuss the results of these reviews with the Board; and to support continuity of top leadership and Chief Executive Officer succession, including through annual reports to the Board.
| | ▪ | annually to evaluate the Chief Executive Officer based on a specific set of performance objectives; |
| | ▪ | for the Chief Executive Officer annually to provide an assessmentDeparture and Election of persons considered potential successors to certain senior management positions and discuss the results of these reviews with the Board of Directors; andDirectors |
| | ▪ | to support continuity of top leadership and Chief Executive Officer succession, including through annual reports to the Board of Directors. |
Departure and Election of Directors in 2012
During 2012,2013, the following changes occurred with respect to the composition of our Board of Directors:Board: On February 14, 2012, Admiral Gary RougheadSeptember 18, 2013, William H. Hernandez was elected to the Board, effective September 19, 2013. The size of Directors; and On November 30, 2012, Mr. Coleman resigned from the Board was also increased from 12 to 13 members at that time.
In accordance with our retirement policy described above, Stephen Frank and Aulana Peters, directors who served during 2013, will not stand for reelection at the 2014 Annual Meeting as they each will have attained their 72nd birthday prior to the Annual Meeting. The Board determined that it was in the best interest of Directors. In December 2012,the Company and our shareholders for General Myers to continue to serve as a director beyond his 72nd birthday and stand for reelection in 2014. Upon Mr. Frank's and Ms. Peters' retirement, the Board of Directors formally reducedintends to reduce the number of members of the Board of Directors from thirteen13 to twelve11 directors.
| | | Communications with the Board of Directors |
Any interested person may communicate with any of our directors, our Board of Directors as a group, our non-employee directors as a group or our Lead Independent Director of the Board through the Corporate Secretary by writing to the following address: Office of the Corporate Secretary, Northrop Grumman Corporation, 2980 Fairview Park Drive, Falls Church, Virginia 22042. The Corporate Secretary will forward all correspondence to the director or directors to whom it is addressed, except for job inquiries, surveys, business solicitations or advertisements and other inappropriate material. The Corporate Secretary may forward certain correspondence elsewhere within our Company for review and possible response. Interested persons may report any concerns relating to accounting matters, internal accounting controls or auditing matters to non-management directors confidentially or anonymously by writing directly to the Chairperson of the Audit Committee, Northrop Grumman Board of Directors c/o Corporate Ethics Office, 2980 Fairview Park Drive, Falls Church, Virginia 22042. Available Information
You may obtain a copy of the following corporate governance materials on the Investor Relations section of our website (www.northropgrumman.com) under Corporate Governance:
| | ▪ | Principles of Corporate Governance; |
| | ▪ | Standards of Business Conduct; |
| | ▪ | Policy and Procedure Regarding Company Transactions with Related Persons; and |
| | ▪ | Board Committee Charters. |
Copies of these documents are also available without charge to any shareholder upon written request to the Corporate Secretary, Northrop Grumman Corporation, 2980 Fairview Park Drive, Falls Church, Virginia 22042.
We disclose amendments to provisions of our Standards of Business Conduct by posting amendments on our website. Waivers of the provisions of our Standards of Business Conduct that apply to our directors or our Corporate Vice Presidents who are members of the Corporate Policy Council and our Chief Accounting Officer (these officers designated as Section 16 officers under the Securities Exchange Act of 1934 ("executive officers")) are disclosed in a Current Report on Form 8-K.
14INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENTI 15
| | CORPORATE GOVERNANCECOMPENSATION OF DIRECTORS
|
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. 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 | | | | | | | | | Victor H. Fazio | | | | l | | | |
| | l | Donald E. Felsinger | | Lead Independent Director | | | | l | | l | | | Stephen E. Frank | | | | Chair | | | | | | l | Bruce S. Gordon | | | | | | l | | | | Chair | Madeleine A. Kleiner | |
| | l | | | | l | | | Karl J. Krapek | | | | | | l | | Chair | | | Richard B. Myers | | | | | | l | | | | l | Aulana L. Peters | | | | l | | | | l | | | Gary Roughead | | | | l | | | | | | l | Thomas M. Schoewe | | | | l | | | | | | l | Kevin W. Sharer | | | | | | Chair | | l | | |
Audit Committee
The Audit Committee meets periodically with management and with both our independent registered public accounting firm and our internal audit management to review audit results, risk management and the adequacy of, and compliance with, our system of internal controls.
The Audit Committee's responsibilities include, among other things, to:
| | ▪ | appoint, subject to shareholder ratification at each Annual Meeting, retain, oversee, evaluate and terminate, if necessary, our independent auditor; |
| | ▪ | review and pre-approve services and related fees considered to be auditing services and permitted non-audit services to be provided by our independent auditor pursuant to pre-approval policies and procedures established by the Audit Committee; |
| | ▪ | meet with the independent auditor to review, among other things, critical accounting policies, material alternative accounting treatments discussed with management, the ramifications of the use of such treatments and the independent auditor's preferred treatment and material written communications with management, including any reports or management letters on significant deficiencies and material weaknesses in internal control over financial reporting, any schedule of unadjusted differences, as well as the results of the audit or review and any opinion or report, which the independent auditor proposes to render in connection with our financial statements; |
| | ▪ | review with our independent auditor the performance and conduct of the audit, any restrictions imposed on the scope of the audit or access to requested |
information and any significant disagreements with management;
| | ▪ | review with our independent auditor and internal auditors the scope and plan of their respective audits and degree of coordination of their plans and discuss with the independent auditor the responsibilities, budget and staffing of the internal audit function; |
| | ▪ | approve the selection, removal and annual compensation of the Vice President, Internal Audit; |
| | ▪ | oversee the internal audit program, including advising on leadership of the internal audit department and reviewing significant issues raised by the internal audit function and, as appropriate, management's actions for remediation as well as any other matters the Audit Committee may deem appropriate; |
| | ▪ | establish and periodically review Company hiring policies for employees or former employees of our independent auditor; |
| | ▪ | prior to filing with the SEC our annual report on Form 10-K and our quarterly reports on Form 10-Q, meet, review and discuss with management, the internal auditors and our independent auditor the financial statements included in such report, our disclosures under "Management's Discussion and Analysis of Financial Condition and Results of Operations," material issues regarding our critical accounting policies and financial statement presentations, and management's assessment of, and report on, the effectiveness of our internal control over financial reporting; |
| | ▪ | determine whether the audited financial statements should be included in our annual report on Form 10-K; |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENTI 15
| | ▪ | review and discuss with management and the independent auditor our earnings press releases and included financial information; |
| | ▪ | review the disclosures by our Chief Executive Officer and Chief Financial Officer regarding the certifications required in each annual or quarterly report filed with the SEC; |
| | ▪ | establish, periodically review and discuss with management procedures for the receipt, retention and treatment of complaints received regarding accounting, internal accounting controls or auditing matters and for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters; and |
| | ▪ | receive periodic reports from the General Counsel on significant legal matters and from the Chief Compliance Officer on the Company's compliance program. |
The responsibilities of the Audit Committee are more fully described in the Audit Committee Charter. The Audit Committee and the Board of Directors review the charter on an annual basis and modify it as appropriate. The Audit Committee charter can be found on the Investor Relations section of our website (www.northropgrumman.com).
The Board of Directors has determined that all members of the Audit Committee are independent and financially literate. Further, the Board of Directors has determined that Mr. Frank, Ms. Kleiner, Ms. Peters and Mr. Schoewe possess accounting or related financial management expertise within the meaning of the NYSE listing standards and that each qualifies as an "audit committee financial expert" as defined by SEC rules. See "Board Meetings and Executive Sessions" section above for a discussion of the Audit Committee's meetings in executive sessions.
Every year, the Audit Committee performs a self-evaluation to identify enhancements to future programs and processes. The Audit Committee held nine meetings in 2012.
Compensation Committee
The Compensation Committee administers and provides strategic direction for our executive compensation and benefit programs. The Compensation Committee oversees our compensation and benefit programs and actions that affect the NEOs as well as all other elected officers.
The Compensation Committee's responsibilities include, among other things, to:
| | ▪ | review at least annually with management our approach for our compensation and benefits program for our elected officers; |
| | ▪ | establish annual and long-term performance objectives for our elected officers; |
| | ▪ | evaluate the performance of elected officers against their respective goals and objectives; |
| | ▪ | recommend the chief executive officer's compensation for approval (or in the case of equity incentive |
compensation awards, ratification) to the independent members of the Board of Directors;
| | ▪ | review and approve the compensation of our elected officers; |
| | ▪ | establish stock ownership guidelines covering elected officers and review ownership levels relative to the guidelines on an annual basis; |
| | ▪ | review and recommend to the independent members of the Board of Directors direct and indirect compensation for non-employee directors, including stock ownership guidelines; |
| | ▪ | oversee strategic planning and design of our employee benefit plans; and |
| | ▪ | review and discuss with management the proposed annual compensation discussion and analysis and recommend to the Board of Directors whether it should be included in the annual proxy statement or other applicable filing with the SEC. |
The Compensation Committee also has the sole authority to appoint and dismiss advisors and compensation consultants, oversee the work of such advisors and approve their compensation. These advisors and compensation consultants report directly to the Compensation Committee.
The Compensation Committee Charter more fully describes the responsibilities of the Compensation Committee and its oversight of the various compensation programs. The charter allows the Compensation Committee to delegate its authority to a subcommittee. The Compensation Committee and the Board of Directors review the charter on an annual basis and modify it as needed. The Compensation Committee charter can be found on the Investor Relations section of our website (www.northropgrumman.com).
The Board of Directors has determined that all members of the Compensation Committee are independent.
Every year the Compensation Committee performs a self-evaluation to identify methodologies for improving future programs and processes. The Compensation Committee held seven meetings in 2012.
Governance Committee
The Governance Committee assists the Board of Directors in identifying qualified potential candidates to serve on the Board of Directors and its committees, assists the Board of Directors in ensuring high standards of corporate governance, coordinates the process for the Board of Directors to evaluate its performance and makes recommendations to the Board of Directors on matters of corporate governance. The Governance Committee also reviews and recommends action to the Board of Directors on matters concerning transactions with related persons.
The Governance Committee's responsibilities also include, among other things, to:
16INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENT
| | ▪ | regularly review our corporate governance policies and practices and recommend proposed changes to the Board of Directors for approval; |
| | ▪ | review and make recommendations to the Board of Directors with respect to: the criteria for board membership, including among other things, diversity, experience and integrity; |
| | ▪ | review and make recommendations with respect to the the general responsibilities and functions of the Board of Directors and its members; and the organization, structure, size and composition of the Board of Directors and its committees; |
| | ▪ | identify individuals who are qualified to serve as members of the Board of Directors pursuant to our corporate governance principles and provide an assessment of whether each such individual would be an independent director; |
| | ▪ | review our charter and bylaws with management no less than annually and recommend any proposed changes to the Board of Directors for approval; |
| | ▪ | review our corporate governance principles and recommend any proposed changes to the Board of Directors for approval; |
| | ▪ | review ownership levels relative to the director stock ownership guidelines on an annual basis; |
| | ▪ | review, at least annually, the standards to be applied by the Board of Directors in making the determinations as to whether a director shall be deemed an independent director and recommend to the Board of Directors any appropriate modifications; |
| | ▪ | recommend to the Board of Directors nominees for election at each annual meeting or special meeting of shareholders where directors are to be elected; |
| | ▪ | make recommendations to the Board of Directors regarding the results of shareholder proposals voted upon at the Annual Meeting of Shareholders; |
| | ▪ | identify committee member qualifications and recommend to the Board of Directors appropriate committee member appointments; and |
| | ▪ | develop and recommend to the Board of Directors an annual self-evaluation process for the Board of Directors and each of its committees. |
The responsibilities of the Governance Committee are more fully described in the Governance Committee Charter. The charter allows the Governance Committee to delegate its authority to a subcommittee. The Governance Committee and the Board of Directors review the charter on an annual basis and modify it as needed. The Governance Committee charter can be found on the Investor Relations section of our website (www.northropgrumman.com).
Every year the Governance Committee performs a self-evaluation to identify methodologies for improving future programs and processes. The Governance Committee held four meetings in 2012.
Policy Committee
The Policy Committee assists the Board of Directors in identifying, evaluating and monitoring certain policy matters that could impact our business.
The Policy Committee's responsibilities include, among other things, to:
| | ▪ | identify and evaluate issues relating to global security, corporate responsibility, political and social matters, environmental sustainability and various other issues and trends that could affect our business activities and performance; |
| | ▪ | review, monitor and provide recommendations regarding our ethics and corporate responsibility programs and policies, including our Standards of Business Conduct; |
| | ▪ | review our public relations and advertising strategy and the manner in which we conduct our public relations activities; |
| | ▪ | review and monitor our government relations strategy and the manner in which we conduct our government relations activities, including the governance and compliance of the political action committees and the Company's policies and practices with respect to political contributions; |
| | ▪ | approve of Company spending to advocate for or against the election of a specific political candidate; and |
| | ▪ | review and monitor our policies and practices with respect to environmental matters, health and safety matters, community relations and charitable organizations (including contributions) and activities. |
The responsibilities of the Policy Committee are more fully described in the Policy Committee Charter. The Policy Committee and the Board of Directors review the charter on an annual basis and modify it as needed. The Policy Committee charter can be found on the Investor Relations section of our website (www.northropgrumman.com).
Every year the Policy Committee performs a self-evaluation to identify methodologies for improving future programs and processes. The Policy Committee held four meetings in 2012.
Attendance at Board of Directors and Committee Meetings and the Annual Meeting
During 2012, the Board of Directors held nine meetings, which included four telephonic meetings. Each of the 12 current directors serving in 2012 attended at least 90% of the total number of board and committee meetings he or she was eligible to attend. Board members are expected to attend the Annual Meeting, except where the failure to attend is due to unavoidable circumstances. All members of the Board of Directors in May 2012 attended the 2012 Annual Meeting.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENTI 17
| | COMPENSATION OF DIRECTORS |
Non-Employee Director Compensation
The Compensation Committee is responsible for reviewing and recommending the compensation of the members of our Board of Directors. In 2012, the Compensation Committee recommended to the Board of Directors, and the Board of Directors approved, the non-employee director fee structure, effective May 15, 2012.Board. The table below lists the annual fees payable to our non-employee directors from January 1, 2012 to May 14, 2012 underfor the prior director fee structure, as well as the annual fees payable under our current director fee structure effective May 15, 2012.year ended December 31, 2013. | | | | | | | | | | Compensation Element | | Amount ($) (1/1/12 – 5/14/12) | | Amount ($) (5/15/12 – present) | | Annual Cash Retainer | | 115,000 |
| | 115,000 |
| | Annual Retainer for Lead Independent Director | | 25,000 |
| | 25,000 |
| | Audit Committee Retainer | | 10,000 |
| | 10,000 |
| | Audit Committee Chair Retainer | | 15,000 |
| | 20,000 |
| | Compensation Committee Chair Retainer | | 15,000 |
| | 15,000 |
| | Governance Committee Chair Retainer | | 10,000 |
| | 10,000 |
| | Policy Committee Chair Retainer | | 7,500 |
| | 7,500 |
| | Annual Equity Grant* | | 130,000 |
| | 130,000 |
| | * | The annual equity grant is deferred into a stock unit account pursuant to the 2011 Long-Term Incentive Stock Plan (the "2011 Plan") as described below. The Northrop Grumman Equity Grant Program for Non-Employee Directors sets forth the terms and conditions of the equity awards granted to non-employee directors under the 2011 Plan. |
| | | | | | | Compensation Element | | Amount ($) | | Annual Cash Retainer | | 115,000 |
| | Annual Retainer for Lead Independent Director | | 25,000 |
| | Audit Committee Retainer | | 10,000 |
| | Audit Committee Chair Retainer | | 20,000 |
| | Compensation Committee Chair Retainer | | 15,000 |
| | Governance Committee Chair Retainer | | 10,000 |
| | Policy Committee Chair Retainer | | 7,500 |
| | Annual Equity Grant* | | 130,000 |
| | | | * The annual equity grant is deferred into a stock unit account pursuant to the 2011 Long-Term Incentive Stock Plan (2011 Plan) as described below. The Northrop Grumman Equity Grant Program for Non-Employee Directors sets forth the terms and conditions of the equity awards granted to non-employee directors under 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 materialsignificant investment in shares of our common stock, non-employee directors are awarded an annual equity grant of $130,000 in the form of deferred stock units ("Automatic(Automatic Stock Units")Units). The units are paid out in the form of common stock at the conclusion of the director's Board service, or earlier, as specified by the director, after he or she has attained five years of service on the Board of Directors. Each director may also elect to defer payment of all or a portion of his or her annual cash retainer and other annual committee retainer fees into a deferred stock unit account ("Elective(Elective Stock Units")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. Deferral elections are 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. Non-employee directors are eligible to participate in our Matching Gifts Program for Education. Under this program, the Northrop Grumman Foundation matches director contributions, up to $10,000 per year per director, to eligible educational programs in accordance with the program.
| | | Stock Ownership Requirements and Anti-Hedging and Pledging Policy |
Non-employee 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 director's election to the Board of Directors.Board. Deferred stock units and Company stock owned outright by the director count towards this requirement. Company policy prohibits members of the Board of Directors from pledging or engaging in hedging transactions with respect to any of their Company stock, or pledging any of their Company stock. We believe this prohibition appropriately alignscontinuing to align the interest of our Board of Directors with those of our shareholders. None of the shares of Company common stock held by our directors are pledged or subject to any hedging transaction. Security Arrangements for Certain Directors
We maintain a comprehensive security program. As a component of this program, we provide certain officers and directors 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 the individuals.
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 identified) and certain NEOs and elected officers receive varying levels of residential and travel protection. Mr. Coleman and Mr. Bush received additional protection based on the specific threat information. That level of protection was provided to Mr. Coleman through part of 2012, as he transitioned from the role of Non-Executive Chairman to Lead Independent Director and director. The security protection for Mr. Coleman in 2012 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. As a result, the cost of providing security for Mr. Coleman during 2012 was higher than the cost of providing Mr. Bush's security.
1816 I NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT
| | COMPENSATION OF DIRECTORS
|
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.
Director Compensation Table | | | 2013 Director Compensation |
The table below provides information on the compensation of our non-employee directors for the year ended December 31, 2012.2013. | | | | | | | | | | | | | | | | | | | | | | Name | | Fees Earned or Paid in Cash ($) (1) | | | | Stock Awards ($) (2) | | All Other Compensation ($) (3) | | | | Total ($) | | Lewis W. Coleman (4) | | 114,584 |
| | (5 | ) | | 119,049 |
| | 4,509,703 |
| | (6) | | 4,743,336 |
| | Victor H. Fazio | | 128,709 |
| | | | 130,000 |
| | 61,991 |
| | (7)(8) | | 320,700 |
| | Donald E. Felsinger | | 136,291 |
| | (9 | ) | | 130,000 |
| | 71,847 |
| | (8) | | 338,138 |
| | Stephen E. Frank | | 143,146 |
| | | | 130,000 |
| | 44,920 |
| | (8) | | 318,066 |
| | Bruce S. Gordon | | 119,718 |
| | | | 130,000 |
| | 42,760 |
| | (8) | | 292,478 |
| | Madeleine A. Kleiner | | 125,000 |
| | | | 130,000 |
| | 43,196 |
| | (7)(8) | | 298,196 |
| | Karl J. Krapek | | 121,291 |
| | | | 130,000 |
| | 52,453 |
| | (7)(8) | | 303,744 |
| | Richard B. Myers | | 117,782 |
| | | | 130,000 |
| | 53,553 |
| | (7)(8) | | 301,335 |
| | Aulana L. Peters | | 125,000 |
| | | | 130,000 |
| | 59,893 |
| | (7)(8) | | 314,893 |
| | Gary Roughead (10) | | 109,203 |
| | | | 113,571 |
| | 3,665 |
| | (8) | | 226,439 |
| | Thomas M. Schoewe | | 125,000 |
| | | | 130,000 |
| | 53,157 |
| | (8) | | 308,157 |
| | Kevin W. Sharer | | 124,437 |
| | | | 130,000 |
| | 65,697 |
| | (8) | | 320,134 |
| | (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 and committee chair retainers and any applicable Lead Independent Director or Chairperson 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. Amounts deferred as Elective Stock Units are reflected in this column. | | (2 | ) | Represents the target value of Automatic Stock Units awarded to each of our non-employee directors in 2012 under the 2011 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 14 of our consolidated financial statements included in our 2012 Form 10-K. | | (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 as follows: Mr. Coleman, $80,191; Mr. Fazio, $40,011; Mr. Felsinger, $45,018; Mr. Frank, $30,963; Mr. Gordon, $18,884; Ms. Kleiner, $18,884; Mr. Krapek, $32,796; General Myers, $28,902; Ms. Peters, $32,942; Admiral Roughead, $1,270; Mr. Schoewe, $3,424; and Mr. Sharer, $65,629. Amounts shown also include perquisites and other personal benefits provided to certain of the directors in 2012 for use of Company aircraft for personal travel, including travel and incidental 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 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 6 below, (ii) Mr. Felsinger's personal and spousal travel on Company aircraft ($26,036), and (iii) Mr. Schoewe's personal and spousal travel on Company aircraft ($49,068). | | (4 | ) | Mr. Coleman resigned from the Board of Directors and its committees on November 30, 2012. | | (5 | ) | Includes $9,272 retainer for service as the Lead Independent Director from January 1, 2012 to May 14, 2012. | | (6 | ) | Amounts include expenses for residential and personal security required for Mr. Coleman under the Company's comprehensive security program. 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 were used, their hourly rates were used to calculate the cost of coverage. During 2012, the Company incurred $4,429,512 in costs related to security protection related to Mr. Coleman. These costs include $1,770,486 attributable to personal and family member travel on Company aircraft consistent with our security program discussed above which required that Mr. Coleman travel on the Company aircraft, and $421,114 attributable to tax gross-ups as follows: $207,929 tax gross-up for temporary secure housing and $213,185 tax gross-up for costs related to security protection. | | (7 | ) | Amounts include matching contributions made through our Matching Gifts Program for Education discussed above as follows: Mr. Fazio, $7,500; Ms. Kleiner, $10,000; Mr. Krapek, $5,000; General Myers, $10,000; and Ms. Peters, $10,000. | | (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 | ) | Includes $15,728 retainer for service as the Lead Independent Director from May 15, 2012 to December 31, 2012. | | (10 | ) | Admiral Roughead was elected to the Board of Directors on February 14, 2012. Amounts shown reflect the prorated amounts of Admiral Roughead's retainer fees and equity grant for 2012. |
| | | | | | | | | | | | | | | | | | | | Name | | Fees Earned or Paid in Cash ($) (1) | | | | Stock Awards ($) (2) | | All Other Compensation ($) (3) | | | | Total ($) | | Victor H. Fazio | | 125,000 |
| | | | 130,000 |
| | 16,281 |
| | | | 271,281 |
| | Donald E. Felsinger | | 140,000 |
| | | | 130,000 |
| | 5,101 |
| | | | 275,101 |
| | Stephen E. Frank | | 145,000 |
| | | | 130,000 |
| | 14,138 |
| | | | 289,138 |
| | Bruce S. Gordon | | 122,500 |
| | | | 130,000 |
| | 1,896 |
| | | | 254,396 |
| | William H. Hernandez (4) | | 35,326 |
| | | | 36,739 |
| | — |
| | | | 72,065 |
| | Madeleine A. Kleiner | | 125,000 |
| | | | 130,000 |
| | 1,896 |
| | | | 256,896 |
| | Karl J. Krapek | | 125,000 |
| | | | 130,000 |
| | 3,388 |
| | | | 258,388 |
| | Richard B. Myers | | 115,000 |
| | | | 130,000 |
| | 13,710 |
| | | | 258,710 |
| | Aulana L. Peters | | 125,000 |
| | | | 130,000 |
| | 14,109 |
| | | | 269,109 |
| | Gary Roughead | | 125,000 |
| | | | 130,000 |
| | 101 |
| | | | 255,101 |
| | Thomas M. Schoewe | | 125,000 |
| | | | 130,000 |
| | 215 |
| | | | 255,215 |
| | Kevin W. Sharer | | 130,000 |
| | | | 130,000 |
| | 9,457 |
| | | | 269,457 |
|
| | | (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 and committee chair retainers and any applicable Lead Independent Director or Chairperson 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. Amounts deferred as Elective Stock Units are reflected in this column. |
| | | (2) | Amounts in this column represent the target value of Automatic Stock Units awarded to each of our non-employee directors in 2013 under the 2011 Plan. The amount reported for each director reflects the aggregate fair value of the stock units on the grant date, as determined under Financial Accounting Standards Board Accounting Standards Codification Topic 718, Stock Compensation, excluding any assumed forfeitures. The grant date fair value assumes the value of dividend equivalents accrued directly on the awarded units. Assumptions used to calculate these amounts are included in Note 14 of our consolidated financial statements included in our 2013 Form 10-K. Each director was credited an aggregate amount of 1,481 Automatic Stock Units, other than Mr. Hernandez who received 328 Automatic Stock Units for the portion of the year in which he served on the Board. |
| | | (3) | Amounts reflected in the "All Other Compensation" column include the estimated dollar value of additional stock units credited to each non-employee director as a result of dividend equivalents earned, directly or indirectly, on reinvested dividend equivalents as such amounts are not assumed in the grant date fair value of stock units shown in the "Stock Awards" column. |
Amounts shown also include matching contributions made through our Matching Gifts Program for Education discussed above as follows: Mr. Fazio, $10,000; Mr. Frank, $10,000; General Myers, $10,000; and Ms. Peters, $10,000. | | | (4) | Mr. Hernandez was elected to the Board on September 18, 2013, effective September 19, 2013. Amounts shown reflect the prorated amounts of Mr. Hernandez's retainer fees and equity grant for 2013. |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT I 1917
| | COMPENSATION OF DIRECTORS
|
Deferred Stock Units As of December 31, 2012,2013, 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 | Name | | Automatic Stock Units | | Elective Stock Units | | Total | Name | | Automatic Stock Units | | Elective Stock Units | | Total | | Victor H. Fazio | Victor H. Fazio | | 12,105 |
| | 8,283 |
| | 20,388 |
| Victor H. Fazio | | 11,837 |
| | 7,096 |
| | 18,933 |
| | Donald E. Felsinger | Donald E. Felsinger | | 13,206 |
| | 10,681 |
| | 23,887 |
| Donald E. Felsinger | | 15,061 |
| | 12,583 |
| | 27,644 |
| | Stephen E. Frank | Stephen E. Frank | | 15,198 |
| | 0 |
| | 15,198 |
| Stephen E. Frank | | 17,848 |
| | 0 |
| | 17,848 |
| | Bruce S. Gordon | Bruce S. Gordon | | 10,186 |
| | 0 |
| | 10,186 |
| Bruce S. Gordon | | 11,959 |
| | 0 |
| | 11,959 |
| | William H. Hernandez | | William H. Hernandez | | 328 |
| | 0 |
| | 328 |
| | Madeleine A. Kleiner | Madeleine A. Kleiner | | 10,186 |
| | 0 |
| | 10,186 |
| Madeleine A. Kleiner | | 11,959 |
| | 0 |
| | 11,959 |
| | Karl J. Krapek | Karl J. Krapek | | 10,186 |
| | 8,477 |
| | 18,663 |
| Karl J. Krapek | | 11,959 |
| | 10,171 |
| | 22,130 |
| | Richard B. Myers | Richard B. Myers | | 14,940 |
| | 0 |
| | 14,940 |
| Richard B. Myers | | 16,843 |
| | 0 |
| | 16,843 |
| | Aulana L. Peters | Aulana L. Peters | | 14,601 |
| | 2,229 |
| | 16,830 |
| Aulana L. Peters | | 14,401 |
| | 0 |
| | 14,401 |
| | Gary Roughead | Gary Roughead | | 1,762 |
| | 0 |
| | 1,762 |
| Gary Roughead | | 3,306 |
| | 0 |
| | 3,306 |
| | Thomas M. Schoewe | Thomas M. Schoewe | | 2,847 |
| | 0 |
| | 2,847 |
| Thomas M. Schoewe | | 4,421 |
| | 0 |
| | 4,421 |
| | Kevin W. Sharer | Kevin W. Sharer | | 16,732 |
| | 16,816 |
| | 33,548 |
| Kevin W. Sharer | | 18,683 |
| | 17,266 |
| | 35,949 |
|
Prior Non-Employee Directors Equity Plans The 1995 Stock Plan for Non-Employee Directors (the "1995(1995 Directors Plan")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 individual's 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 of common stock underlying outstanding option awards that are exercisable as of December 31, 2012:2013: | | | | | | Name | | # Shares Underlying Outstanding Option Awards | | Victor H. Fazio | | 3,281 |
| | Donald E. Felsinger | | 0 |
| | Stephen E. Frank | | 0 |
| | Bruce S. Gordon | | 0 |
| | William H. Hernandez | | 0 |
| | Madeleine A. Kleiner | | 0 |
| | Karl J. Krapek | | 0 |
| | Richard B. Myers | | 0 |
| | Aulana L. Peters | 3,281 | 281 |
| | Gary Roughead | | 0 |
| | Thomas M. Schoewe | | 0 |
| | Kevin W. Sharer | | 6,562 |
|
18INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
| | COMPENSATION OF DIRECTORS
|
Director Equity Plan Under the Northrop Grumman Non-Employee Directors Equity Participation Plan (the "Director(Director Equity Plan")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 Mr. Sharer currently participates in this plan. Ms. Peters and Messrs.Mr. Fazio and Sharer participatealso participated in this plan.the Director Equity Plan; stock units awarded to them under the plan were paid out in shares of common stock in January 2013. Stock units awardawarded to Ms. Peters and Messrs. Fazio andMr. Sharer pursuant to the Director Equity Plan are included in the Deferred Stock Units table above. 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 participant's 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 has attained age 70 prior to the annual meeting of 20INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENT
| | COMPENSATION OF DIRECTORS |
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 directorsthe participant will immediately be entitled to receive the full balance of theirthe equity participation account under the Director Equity Plan regardless of the number of years of consecutive service, although paymentspayment of theirhis or her 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 directorsremaining director participating in the Director Equity Plan do receivereceives quarterly dividend accruals on the balancesbalance held in their respectivehis equity participation accounts.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT I 2119
Table of Contents | | TRANSACTIONS WITH RELATED PERSONS AND CONTROL PERSONS
|
| | | Related Person Transaction Policy |
The Board of DirectorsCompany has approved a written policy and procedures for the review, approval and ratification of transactions among our Company and our directors, executive officers and related persons.persons, approved by the Board. A copy of the policy is available on the Investor Relations section of our website (www.northropgrumman.com)(www.northropgrumman.com). The policy requires that all related person transactions be reviewed and approved or ratified, as applicable, by the Governance Committee. The Governance Committee may approve or ratify related person transactions at its discretion if the transaction is deemed fair and reasonable to the Company. The policy defines a related person transaction as any transaction in which the Company was, is or will be a participant, where the amount involved exceeds $120,000, and in which a related person had, has or is expected to have a direct or indirect material interest. A "related person" includes: | | ▪ | any of our directors or executive officers; |
| | ▪ | any person who is known to be the beneficial owner of more than 5% of any class of our voting securities; |
| | ▪ | an immediate family member of any such person; and |
| | ▪ | any firm, corporation, or other entity controlled by any such person. |
any of our directors or executive officers; any person who is known to be the beneficial owner of more than 5% of any class of our voting securities; an immediate family member of any such person; or any firm, corporation, or other entity controlled by any such person. The Corporate Secretary may determine that a transaction in an amount less than $120,000 should nonetheless be deemed a related person transaction. If this occurs, the transaction would also be required to be submitted to the Governance Committee for review and approval or ratification. The policy requires each director and executive officer to complete an annual questionnaire to identify his or her related interests and persons and to notify the Corporate Secretary of any changes to that information. If the Governance Committee does not recommend ratification of a related person transaction or the Board of Directors does not ratify a related person transaction that is pending or ongoing, the Governance Committee will refer the transaction to management for amendment or termination and determine whether other action is appropriate. Certain Relationships and
| | | Related Person Transactions |
In 2012,2013, none of our directors or executive officers was a participant in or had a relationship regarded as a related person transaction, as considered under our corporate written policyRelated Person Transaction Policy and applicable regulations of the SEC and the NYSE listing standards.
| | | Compensation Committee Interlocks and Insider Participation |
During 2012,2013, Messrs. Coleman, Felsinger, Gordon, Krapek, Myers and Sharer served as members of the Compensation Committee. During 2012,2013, no member of the Compensation Committee had a relationship with the Company or any of our subsidiaries, other than as directors and shareholders, and no member has ever beenwas an officer or employee of the Company or any of our subsidiaries, a participant in a related person transaction or an executive officer of another entity, where one of our executive officers serves on the board of directors that would constitute a related party transaction or raise concerns of a compensation committee interlock. Certain
The Board has recently revised the Company’s recoupment policy to expand the circumstances under which and the employees from whom the Company may recoup incentive compensation, and also to provide for disclosure. The policy applies to performance-based short or long-term, cash or equity incentive payments. In summary terms, the revised policy provides, among other things: the Board has discretion to recoup incentive compensation paid to an elected officer in the event of a restatement or if an elected officer engages in illegal conduct that causes significant financial or reputational harm to the Company; the Board has discretion to recoup incentive compensation paid to the elected officer in the event the elected officer fails to report such misconduct of another, or is grossly negligent in fulfilling his or her supervisory responsibilities to prevent such misconduct; for a three-year look back on the recoupment of incentive compensation; for disclosure of recoupments and context consistent with SEC and other legal requirements; and that the Chief Executive Officer has discretion to recoup under similar circumstances incentive compensation provided to non-elected officers or other employees. 20INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
Table of Contents | | TRANSACTIONS WITH RELATED PERSONS AND CONTROL PERSONS
|
In December 2013, the Board of Directors approved a change to the Company's bylaws to include a forum selection clause, and publicly filed such changes with the SEC. The forum selection clause provides generally that the Delaware Court of Chancery is the exclusive forum for (i) derivative actions brought on behalf of the Company; (ii) actions asserting a breach of fiduciary duty by a director, officer or other employee; (iii) actions governed by the internal affairs doctrine and (iv) certain other actions arising under Delaware Corporation law or the Company's Certificate of Incorporation or Bylaws. The Board adopted this clause because it believes it to be in the best interests of the Company and our shareholders. The clause is intended to benefit the Company and shareholders in significant part by directing litigation to a single Delaware court, which will apply its own state law with a well-established body of precedent, thereby reducing the risk and expense of concurrent, multi-jurisdictional litigation, saving Company resources (money and management attention) and leading to a single, more predictable outcome in litigation involving corporate governance and internal affairs. The clause does not preclude any type of litigation against the Company, its officers or directors; it simply channels certain litigation to a single, experienced court to enable a more efficient and effective resolution of disputes tied to Delaware. The amended Bylaws also make clear that the Board may, under certain circumstances, waive the forum selection clause if it determines that it is in the best interests of shareholders.
| | | Indemnification Agreements |
Our Bylaws generally require us generally to indemnify our directors and executive officers to the fullest extent permitted by Delaware law. Additionally, as permitted by Delaware law, we have entered into indemnification agreements with each of our directors and elected officers. Under the indemnification agreements, we have agreed to hold harmless and indemnify each indemnitee, generally to the fullest extent permitted by Delaware law, against expenses, liabilities and loss incurred in connection with threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative to which the indemnitee is made a party by reason of the fact that the indemnitee is or was a director or officer of the Company or any other entity at our request, provided however, that the indemnitee acted in good faith and in a manner reasonably believed to be in the best interests of our Company. 22INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENTI 21
| | SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
|
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own more than ten percent of our common stock, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC. Based on our review of Forms 3, 4 and 5 we have received or have filed on behalf of our executive officers and directors, and of written representation from those persons that they were not required to file a Form 5, we identified one Form 3 filing for David Perry, appointed in 2012 as our Corporate Vice President and Chief Global Business Development Officer, that, due to an administrative error, omitted certain ownership holdings held by him at the time of filing. This ownership holding was subsequently reflected on an amended Form 3 filing for Mr. Perry. We believe that all otherrequired filings were made on a timely basis during the year ended December 31, 2012.2013. 22INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENTI 23
| | VOTING SECURITIES AND PRINCIPAL HOLDERS
|
| | | Stock Ownership of Certain Beneficial Owners |
As of December 31, 2012,2013, there were 239,209,812217,599,230 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, 2012:2013: | | | Name and Address of Beneficial Owner | | Amount and Nature of Beneficial Ownership of Common Stock | | | Percent of Class | | Amount and Nature of Beneficial Ownership of Common Stock | | | Percent of Class | | State Street Corporation | | 26,428,624 | (1) | | 11 | % | | 24,301,674 | (1) | | 11 | % | | One Lincoln Street, Boston, MA 02111 | | | | | | | | | | Capital World Investors | | 13,314,223 | (2) | | 6 | % | | | 333 South Hope Street, Los Angeles, CA 90071 | | | | | | | BlackRock, Inc. | | 20,469,117 | (3) | | 9 | % | | 21,221,059 | (2) | | 10 | % | 40 East 52nd Street, New York, NY 10022 | | | | | | | | | | The Vanguard Group | | | 11,323,546 | (3) | | 5 | % | | 100 Vanguard Blvd., Malvern, PA 19355 | | | | | |
| | (1) | This information was provided by State Street Corporation ("State Street")(State Street) in a Schedule 13G filed with the SEC on February 12, 2013.4, 2014. According to State Street, as of December 31, 2012,2013, State Street had shared voting power over 26,428,624 shares and shared dispositive power over 26,428,62424,301,674 shares. This total includes 15,633,64614,016,634 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"),BlackRock, Inc. (BlackRock) in a Schedule 13G/A filed with the SEC on February 13, 2013.11, 2014. According to Capital World,BlackRock, as of December 31, 2012, Capital World2013, BlackRock had sole voting power over 17,796,270 shares and sole dispositive power over 13,314,22321,221,059 shares. |
| | (3) | This information was provided by BlackRock, Inc. ("BlackRock")The Vanguard Group (Vanguard), in a Schedule 13G/A13G filed with the SEC on February 1, 2013.12, 2014. According to BlackRock,Vanguard, as of December 31, 2012, BlackRock2013, Vanguard had sole voting andpower over 363,939 shares, sole dispositive power over 20,469,11710,985,241 shares and shared dispositive power over 338,305 shares. |
24INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENTI 23
| | VOTING SECURITIES AND PRINCIPAL HOLDERS
|
| | | Stock Ownership of Officers and Directors |
The following table shows beneficial ownership of our common stock as of March 19, 201318, 2014 by each of our current directors, each director nominee, the Named Executive Officersour NEOs and all directors, director nominees and executive officers as a group. As of March 19, 2013,18, 2014, there were 235,473,173215,838,316 shares of our common stock outstanding.
None of the persons named below beneficially owns in excess of 1% of our outstanding common stock. Unless otherwise indicated, each individual has sole investment power and sole voting power with respect to the shares owned by such person.
| | | | | Shares of Common Stock Beneficially Owned | | Share Equivalents (1) | | Shares Subject To Option (2) | | Total | | | | Shares of Common Stock Beneficially Owned | | Share Equivalents (1) | | Shares Subject To Option (2) | | Total | | | Non-Employee Directors | | | | | | | | | | | | | Non-Employee Directors/Director Nominees | | | | | | | | | | | | Victor H. Fazio | | 14,724 |
| | (3) | | 16,975 |
| | 3,281 |
| | 34,980 |
| | | | 14,762 |
| | (3) | | 18,934 |
| | 0 |
| | 33,696 |
| | | | Donald E. Felsinger | | 4,640 |
| | (4) | | 23,887 |
| | 0 |
| | 28,527 |
| | | | 4,640 |
| | (4) | | 27,645 |
| | 0 |
| | 32,285 |
| | | | Stephen E. Frank | | 1,000 |
| | | | 15,918 |
| | 0 |
| | 16,918 |
| | | | 1,000 |
| | | | 17,848 |
| | 0 |
| | 18,848 |
| | | | Bruce S. Gordon | | 0 |
| | | | 10,186 |
| | 0 |
| | 10,186 |
| | | | 0 |
| | | | 11,959 |
| | 0 |
| | 11,959 |
| | | | William H. Hernandez | | | 1,000 |
| | 329 |
| | 0 |
| | 1,329 |
| | | Madeleine A. Kleiner | | 0 |
| | | | 10,186 |
| | 0 |
| | 10,186 |
| | | | 0 |
| | | | 11,959 |
| | 0 |
| | 11,959 |
| | | | Karl J. Krapek | | 0 |
| | | | 18,663 |
| | 0 |
| | 18,663 |
| | | | 2,349 |
| | | | 19,781 |
| | 0 |
| | 22,130 |
| | | | Richard B. Myers | | 0 |
| | | | 14,940 |
| | 0 |
| | 14,940 |
| | | | 0 |
| | | | 16,844 |
| | 0 |
| | 16,844 |
| | | | Aulana L. Peters | | 9,572 |
| | (5) | | 12,563 |
| | 3,281 |
| | 25,416 |
| | | | 9,572 |
| | (5) | | 14,402 |
| | 0 |
| | 23,974 |
| | | | Gary Roughead | | 0 |
| | | | 1,762 |
| | 0 |
| | 1,762 |
| | | | 0 |
| | | | 3,306 |
| | 0 |
| | 3,306 |
| | | | Thomas M. Schoewe | | 3,160 |
| | | | 2,847 |
| | 0 |
| | 6,007 |
| | | | 3,160 |
| | | | 4,422 |
| | 0 |
| | 7,582 |
| | | | Kevin W. Sharer | | 2,995 |
| | | | 33,548 |
| | 6,562 |
| | 43,105 |
| | | | 2,995 |
| | | | 35,950 |
| | 0 |
| | 38,945 |
| | | | Named Executive Officers | | | | | | | | | | | | | | | | | | | | | Wesley G. Bush (6) | | 443,585 |
| | (7) | | 5,068 |
| | 732,082 |
| | 1,180,735 |
| | | | 448,649 |
| | (7) | | 5,218 |
| | 0 |
| | 453,867 |
| | | | James F. Palmer | | 144,928 |
| | | | 0 |
| | 371,327 |
| | 516,255 |
| | | | 225,130 |
| | | | 0 |
| | 0 |
| | 225,130 |
| | | | Gary W. Ervin (8) | | 28,854 |
| | 0 |
| | 267,327 |
| | 296,181 |
| | | | | James F. Pitts (8) | | 2,829 |
| | | | 0 |
| | 521,024 |
| | 523,853 |
| | | | | Gloria A. Flach | | | 11,937 |
| | 0 |
| | 101,236 |
| | 113,173 |
| | | | Linda A. Mills | | 70,415 |
| | (9) | | 12,180 |
| | 317,937 |
| | 400,532 |
| | | | 102,690 |
| | (8) | | 0 |
| | 64,544 |
| | 167,234 |
| | | | Thomas E. Vice | | | 23,110 |
| | | | 0 |
| | 14,344 |
| | 37,454 |
| | | | Other Executive Officers | | 156,657 |
| | | | 9,799 |
| | 388,209 |
| | 554,665 |
| | | | 158,543 |
| | | | 11,041 |
| | 120,272 |
| | 289,856 |
| | | | All Directors and Executive Officers as a Group (27 persons) | | 883,359 |
| | | | 188,522 |
| | 2,611,030 |
| | 3,682,911 |
| | (10 | ) | | | All Directors/Director Nominees and Executive Officers as a Group (26 persons) | | | 1,009,537 |
| | | | 199,638 |
| | 300,396 |
| | 1,509,571 |
| | (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 director's service on the Board of Directors. Certain of the NEOs hold share equivalents with pass-through voting rights in the Northrop Grumman Savings Plan or the Northrop Grumman Financial Security and Savings Program. |
| | (2) | These shares subject to option are either currently exercisable or exercisable within 60 days of March 19, 2013.18, 2014. |
| | (3) | Includes 846884 shares held in our Dividend Reinvestment Plan. |
| | (4) | Includes 770 shares each held in the Courtney Strickland and Stephanie Strickland trust, respectively, for which Mr. Felsinger's wife serves as trustee and 1,550 shares each held in the Gregory Felsinger and Michael Felsinger trust, respectively, for which Mr. Felsinger serves as trustee. |
| | (5) | Includes 3,238 shares held in the Peters Family Trust of which Ms. Peters is the trustee. |
| | (6) | Mr. Bush is also Chairman of the Board of Directors. |
| | (7) | Includes the following shares: 323,585388,649 shares are held in the W.G. and N.F. Bush Family Trust and 40,000 shares are held in each of the Bush Trust No 1 2012 Irrevocable Trust, the Bush Trust No 2 2012 Irrevocable Trust and the Bush Trust No 3 2012 Irrevocable Trust.which Mr. Bush and his wife are trustees of each of the trusts.trustees. |
| | | (8) | Messrs. Ervin and Pitt ceased serving as executive officers effective December 31, 2012. Ownership information provided is as of December 31, 2012. |
| | (9) | Includes 43,87183,029 shares held in the Linda Anne Mills Living Trust. |
| | (10)(9) | Total represents 1.56%0.7% of the outstanding common stock as of March 19, 2013.18, 2014. |
24INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENTI 25
| | EQUITY COMPENSATION PLAN INFORMATION
|
Equity Compensation Plan Information
| | | Equity Compensation Plan Information |
We currently maintain four equity compensation plans: the 2011 Plan, the 2001 Long-Term Incentive Stock Plan (the "2001 Plan")(2001 Plan), the 1995 Directors Plan and the 1993 Directors Plan. Each of these plans has been approved by our shareholders. The following table sets forth, for each of our equity compensation plans, the number of shares of our common stock subject to outstanding stock options, the weighted-average exercise price of the outstanding stock options and the number of shares remaining available for future award grants as of December 31, 2012.2013. | | | 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 remaining available for future issuance under equity compensation plan (excluding shares reflected in the first column) (3) | | | | 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 remaining available for future issuance under equity compensation plan (excluding shares reflected in the first column) (3) | | | | Equity compensation plans approved by shareholders | | 15,620,902 |
| | 58 |
| | 36,801,359 |
| | | | 9,499,891 |
| | 56 |
| | 28,489,141 |
| | | | Equity compensation plans not approved by shareholders | | N/A |
| | N/A |
| | N/A |
| | | | N/A |
| | N/A |
| | N/A |
| | | | Total | | 15,620,902 |
| | 58 |
| | 36,801,359 |
| | (4) | | | | | | 9,499,891 |
| | 56 |
| | 28,489,141 |
| | (4) |
| | (1) | Of these shares, 19,68610,124 were subject to stock options then outstanding under the 1995 Directors Plan, 44,24214,748 were subject to stock options then outstanding under the 2011 Plan and 6,207,4361,694,752 were subject to stock options then outstanding under the 2001 Plan. In addition, this number includes 1,959,6883,209,757 shares that were subject to outstanding stock awards granted under the 2011 Plan, 1,518,027210,163 shares that were subject to outstanding stock awards granted under the 2001 Plan, and reflects 3,372,4372,434,291 awards earned at year end but pending distribution subject to final performance adjustments, and 169,155185,728 shares subject to outstanding stock units credited under the 1993 Directors Plan. Additional performance shares of 2,330,2311,740,328 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 1,223,619 stock options that were out-of-the-money as of December 31, 2012. |
| | (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, 36,801,35928,489,141 were available under the 2011 Plan as of December 31, 2012.2013. No new awards may be granted under the 1993 Directors Plan or the 2001 Plan. |
| | (4) | After giving effect to our February 20132014 awards, the number of shares of common stock remaining for future issuance would be 27,760,46924,128,995 (assuming maximum payout of such awards). |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENTI 25
| | PROPOSAL TWO: ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS |
We are providing our shareholders with the opportunity to cast a non-binding, advisory vote on the compensation of our NEOs. This advisory vote, commonly known as "say on pay," gives our shareholders the opportunity to express their view on our 2013 executive compensation programs and policies for our NEOs. The vote does not address any specific item of compensation and is not binding on the Board; however, as an expression of our shareholders' view, the Compensation Committee seriously considers the vote when making future executive compensation decisions.
Performance-Based Compensation Programs We believe our compensation programs reflect responsible, measured practices that effectively incentivize our executives to dedicate themselves fully to value creation for our shareholders, customers and employees. A significant portion of the compensation of our CEO (66.8%) and NEOs (58.1%, on average) is performance-based variable pay, of which the basis for payout is our annual and three-year performance against our Performance Peer Group and the S&P Industrials. The targets and thresholds of our annual incentive plan are based on the performance of our peers. Our long-term incentive plan is based on total shareholder return relative to our Performance Peer Group and the S&P Industrials. We also benchmark our pay programs against industry competitors to help us attract and retain the leadership critical to achieving our business goals. Our Compensation Discussion and Analysis (CD&A) provides a detailed discussion of our performance-based approach to executive compensation.
Strong Governance and Alignment to Shareholders Our pay practices are aligned with our shareholders' interests and with industry practice. We believe our executive compensation programs are governed by a set of policies and practices that are best in class. Examples of those adopted include: Double-trigger provisions for change in control situations, and no excise tax gross-ups for payments upon termination after a change in control; A recoupment policy for cash and equity incentive compensation payments; Stock ownership guidelines of 7x base salary for the CEO and 3x base salary for other NEOs, and stock holding requirements of three years from the vesting date; and No hedging or pledging of company stock. For a list of our best practices, refer to page 28 of the CD&A. We encourage you to read the CD&A, this Proxy Statement and our 2013 Form 10-K, which describes our business and 2013 results in more detail.
Recommendation The compensation of our executives is aligned to performance, is sensitive to shareholder returns, appropriately motivates and retains our executives, and is a competitive advantage in attracting and retaining the high caliber talent necessary to drive our business forward and build sustainable value for our shareholders. Accordingly, the Board recommends that shareholders approve the following resolution: "RESOLVED, that, as an advisory matter, the shareholders of Northrop Grumman Corporation approve the compensation paid to the Company's named executive officers as disclosed in this Proxy Statement pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion."
Vote Required Approval of Proposal Two requires that the votes cast "for" the proposal exceed the votes cast "against" the proposal. Abstentions and broker non-votes will have no effect on this proposal.
| | | | | | | THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL TWO. |
26 I NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT
| | COMPENSATION COMMITTEE REPORTDISCUSSION AND ANALYSIS
|
TheIn this Compensation Discussion and Analysis (CD&A), we provide an overview of our executive compensation programs and the underlying philosophy used to develop the programs. This section details the material components of our executive compensation programs for our 2013 Named Executive Officers (NEOs) and explains how and why the Compensation Committee of our Board (the Compensation Committee) arrived at certain specific compensation policies and decisions involving the Company hasNEOs. The 2013 compensation of our NEOs is provided in the Summary Compensation Table and other compensation tables contained in this Proxy Statement.
2013 NEOs
WESLEY G. BUSH JAMES F. PALMER GLORIA A. FLACH LINDA A. MILLS THOMAS E. VICE
| | | Compensation Committee Report |
The Compensation Committee reviewed and discussed the Compensation Discussion and AnalysisCD&A as required by Item 402(b) of Regulation S-K of the Securities and Exchange Commission with management and, basedmanagement. Based on such review and discussion, the Compensation Committee recommended to the Board of Directors that this Compensation Discussion and AnalysisCD&A be included in this Proxy Statement. The Board has approved thatthe recommendation.
COMPENSATION COMMITTEE
KEVIN W. SHARER, CHAIRMAN DONALD E. FELSINGER BRUCE S. GORDON KARL J. KRAPEK RICHARD B. MYERS
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT I 27
| | COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY
|
| | | Summary of Our Executive Compensation Programs |
Our executive compensation philosophy is to provide a complementary set of compensation programs to our NEOs with attractive, flexible and market-based total compensation tied to annual and long-term relative performance and aligned with the interests of our shareholders. The key elements of our executive compensation programs for our NEOs are summarized below. | | | | | | | | | | | Compensation Element | | Purpose | | | | In this section, we provide an overview of our executive compensation programs and the underlying philosophy used to develop the programs. This section details the material components of our executive compensation programs for our 2012 "Named Executive Officers" or "NEOs" listed below and explains how and why the Compensation Committee of our Board (the "Compensation Committee") arrived at certain specific compensation policies and decisions involving the NEOs. On the following pages, the Executive Summary of the Compensation Discussion & Analysis ("CD&A") provides a brief overview of our business and 2012 performance and summarizes our executive compensation programs. We have included this summary to assist you in reviewing the 2012 compensation earned by our NEOs. The 2012 compensation of our NEOs is provided in the Summary Compensation Table and other compensation tables contained in this Proxy Statement.
| | | 2012 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 | Key Characteristics | | | | | | | | | | Fixed Component | | Base Salary | | Compensate fairly and competitively | | Determined by responsibility, level of position, competitive pay assessment and individual performance | | | | | | | | LTIP Restricted Stock Rights (RSRs) | | Link the interests of our executive officers to shareholders and retain executive talent | | 30% of annual LTIP grant SHAREHOLDER ENGAGEMENTThree-year cliff vesting
| | | | | | | | | Performance-Based Component | | Annual Incentive Plan (AIP) | | Motivate and reward achievement of annual business objectives | | Financial Metrics*: Pension-adjusted Operating Margin (OM) Rate, Free Cash Flow Conversion, Awards (Book-to-bill), and Pension-adjusted Net Income
We welcome feedback from our shareholders regardingSubject to downward adjustment for failure to achieve non-financial objectives
| | | | | | | | LTIP Restricted Performance Stock Rights (RPSRs) | | Link the interests of our executive compensation programs. Shareholders desiringofficers to communicate with the Board or Compensation Committee may do so as described under "Communications with the Boardshareholders and retain executive talent | | 70% of Directors" in this Proxy Statement.annual LTIP grant Three-year performance period Actual shares earned based on TSR relative to Performance Peer Group and S&P Industrials | * Some of these financial metrics are non-GAAP financial measures. For more information, see "Miscellaneous - Use of Non-GAAP Financial Measures." |
| | | Our Compensation Pay Practices (pages 31-41) |
Our compensation programs incorporate many best practices, including the following: | | | | | | | | | | Best Practices | | | | | | | | | | Pay for Performance | | | Annual Peer Group Review | | | No Hedging or Pledging of Company Stock | | Increased Performance Thresholds Necessary to Exceed Annual Target and to Achieve Maximum Compensation | | | Independent Consultant Reports Directly to the Compensation Committee | | | No Dividend Equivalents Paid Prior to Vesting (Dividend Equivalents Starting with 2012 Grants) | | Long-Term Incentives Based on Relative TSR | | | Double Trigger Provisions for Change in Control | | | No Individual Change in Control Agreements | | Cap on Annual Bonuses and Performance-Based Long-Term Incentive Share Payouts | |
| Recoupment Policy on Incentive Compensation Payments
Stock Ownership Guidelines and Stock Holding Requirements | | | No Excise Tax Gross-ups for Payments Received Upon Termination After a Change in Control | | Total Direct Compensation Aimed at Market Median | | | | |
28 I NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT
| | COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY
|
| | | 2013 Performance Highlights |
Our Business Northrop Grumman isfocus on performance resulted in strong 2013 financial results. Diluted EPS increased 7% to $8.35. We generated a leading global security company providing innovative systems, products and solutions in unmanned systems; cybersecurity; C4ISR; and logistics and modernization to government and commercial customers worldwide. Our primary customer is the U.S. Government. For more information regarding our business, see "Business" and "Management's Discussion and Analysispension-adjusted operating margin rate of Financial Condition and Results of Operations" in our 2012 Form 10-K.
2012 Highlights
Performance, effective12.0%; cash deployment and portfolio alignment are important drivers of value creation for our shareholders, customers and employees.
Performance Highlights: Earnings per share from continuing operations increased 5% to $7.81 from $7.41 and reflects improved operating performance and effective cash deployment, which more than offset lower sales and lower net FAS/CAS pension income in 2012. Our businesses improved segment operating income as a percentage of sales to 12.6% from 11.6%. We also generated strong cash from operations and free cash flow in 2012. Cash provided by operations before our discretionary after-tax pension contributions totaled approximately $2.8 billion and free cash flowFree Cash Flow before discretionary after-tax pension contributions ("FCF") totaled $2.5$2.4 billion. In addition,We used our performance improved against all three of the financial metrics used to determine our annual incentive award. New business awards grew to $26.5 billion, pension-adjusted operating margin rate expanded 100 basis points to 11.9% and FCF conversion improved to 126%. For the long-term incentive award, our TSR score over the three-year measurement period was top quartile as measured against the Performance Peer Group and above median as measured against the S&P industrials.
Cash Deployment Highlights: Our strong cash generation allowed us to repurchase 20.927.3 million shares for $1.3$2.4 billion, which reduced ourreducing weighted average shares outstanding shares by 10% and contributed to the growth in our earnings per share.8%. We also raised our quarterly dividend 10%11% to an annualized rate of $2.20$2.44 per share, our ninthtenth consecutive annual dividend increase. CashIn total we returned $2.9 billion to shareholders through dividends and share repurchases, totaled more than $1.8 billion, or 80%138% of reported FCF in 2012.2013 Free Cash Flow.
Portfolio Highlights: We continued to refine our portfolio by divesting or de-emphasizing certain non-core and underperforming businesses and selectively making acquisitions that enhance our capabilities or market position. These actions improved our financial performance and reinforced our position as a leading global security company providing innovative systems, products and solutions in unmanned systems, cybersecurity, C4ISR and logistics and modernization to government and commercial customers worldwide. | | | | EPS Growth | | | •2013 Diluted EPS grew 7% •2013 Pension-adjusted Diluted EPS grew 5% •EPS grew despite lower sales •EPS growth reflects strong operating performance and 8% reduction in weighted average shares outstanding | | | | Free Cash Flow per Share | | | •2013 Free Cash Flow per Share comparable to 2012 • 2013 Pension-adjusted Free Cash Flow per Share increased 6%
• 2013 Free Cash Flow per Share 109% of Diluted EPS •2013 Pension-adjusted Free Cash Flow per Share 132% of Pension-adjusted EPS |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT I 29
| | COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVESUMMARY
|
| | | Performance Against Incentive Compensation Metrics |
2013 performance exceeded target against three of Our Executive Compensation Programs The elements of our executive compensation provide an attractive, flexible and market-based total compensation program tiedthe four financial metrics used to long-term relative performance and aligneddetermine AIP, with the interests offollowing results:
Pension-adjusted OM Rate: 12.0% Free Cash Flow Conversion: 125% Awards (Book-to-bill): 0.85 Pension-adjusted Net Income: $1.8 billion For LTIP, our shareholders. The following table summarizes key elements of our executive compensation programs for our NEOs.three-year TSR score was in the 56th percentile as measured against the Performance Peer Group identified on page 33 and the 85th percentile as measured against the S&P industrials.
| | | | Compensation Component
| Key Characteristics | Purpose | Base Salary | Fixed compensation component; reviewed annually and adjusted if and when appropriate. | Compensate an executive officer fairly for the responsibility level of the position and competitively within our industry. | Annual Incentive | Variable compensation component.
Performance-based award determined by annual corporate performance against objectives established based on the performance of our peer group and other objectives established by the Board. Payout range is from 0% of target to a maximum of 200%.
Financial metrics weighted as follows: New Business Awards (20%), subject to a negative backlog score adjustment, Pension-Adjusted Operating Margin Rate (40%), subject to a risk adjustment factor, and Free Cash Flow Conversion (40%).
Actual cash bonus earned is determined by our financial performance of the company, subject to a downward adjustment if the aggregate performance targets for the six non-financial metrics are not achieved. The non-financial metrics, with empirical values, are aligned to our stakeholders (Customer Satisfaction, Quality, Environmental Sustainability, Diversity, Employee Engagement and Safety). Each metric is designed to drive improvement over time.
| Motivate and reward executive officers for achieving annual business objectives that drive overall performance.
| Long-Term Incentive | Variable compensation component, generally granted annually.
70% of the annual long-term incentive ("LTI") grant to our NEOs is Restricted Performance Stock Rights ("RPSRs") and 30% is Restricted Stock Rights ("RSRs"). The actual number of RPSR shares earned is determined based on relative total shareholder return ("TSR"). RSRs have a three-year cliff vesting period. For 2012, no stock options were granted.
The relative TSR metric compares our share performance over a three-year period to the performance of the Performance Peer Group (as defined below) and the S&P Industrials.
Beginning with the 2012 grant, the payout range of RPSR grants is 0% to 150% of the original award granted, and the payout for a three-year performance period is capped at 100% of shares granted if absolute TSR performance over the performance period is negative, even if our performance relative to the other industry benchmarks would have resulted in a higher score. For the 2012 grant, dividends will accrue on both RPSR and RSR awards earned to be paid upon award payout.
Double-trigger accelerated vesting provision upon a change in control.
| Motivate and reward executive officers to achieve our business objectives. Ties incentives to the long-term performance of our stock and reinforces the link between the interests of our executive officers and our shareholders. Serves as key retention vehicle for executive officers.
| Holding Requirement | NEOs are required to hold, for a period of three years, 50% of their net shares (after-tax) earned from RPSR and RSR grants and stock options granted in 2010 or subsequent years. | Further align management and shareholder interests and emphasize the importance of sustainable performance and appropriate risk-management behaviors. Mix |
The Compensation Committee supports a balanced pay for performance compensation structure that places an appropriate level of compensation at risk, based on our financial and non-financial performance measures and relative TSR. The annual incentive award is determined by our financial performance and is subject to a downward only adjustment for performance against non-financial goals. For NEOs, the value of LTI RPSR compensation is determined by relative TSR. Achievement of both annual incentive goals and increased shareholder value will result in individual awards commensurate with results; however, if absolute TSR is negative, the maximum RPSR payout is capped at 100%, even if the relative TSR would have resulted in a higher score. The following charts show performance-based compensation elements at target values.
30 I NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT
| | COMPENSATION DISCUSSION AND ANALYSIS | EKXECUTIVEEY SPUMMARYRINCIPLES
|
| | | | Compensation Component
| Key Characteristics | Purpose | Stock Ownership Requirement | NEOs are required to own a multiple of their salary in Company stock (CEO - 7x, all other NEOs - 3x). | Align management Philosophy and shareholder interests. | Hedging and Pledging of Company Stock | Company policy prohibits executive officers from engaging in hedging transactions with respect to Company stock or pledging Company stock. | Align management and shareholder interests. | Health and Welfare and Retirement Plans | Fixed compensation component. | Provide benefits that promote employee health, productivity and retention. | Perquisites and Other Benefits | Fixed compensation component. | Provide a business-related benefit to our Company and assist in attracting and retaining executive officers. | Severance Benefits | Fixed compensation component.
Benefit for NEOs (other than the CEO) is 1.5x base salary and payout of the target annual bonus. The CEO is not covered under our severance plans or policies.
| Provide temporary income replacement following an executive officer's involuntary termination of employment. | Change in Control | Individual change in control agreements and change in control severance plans were terminated in 2010. | Objectives |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENTI 31
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES
|
COMPENSATION PHILOSOPHY AND OBJECTIVES
We 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 executives and other key employees capable of achieving top performance and generating value for our shareholders, customers and other stakeholders. Our goal is to lead our industry in sustainable performance, maintaining strong, enduring values. The targets and thresholds of our annual incentive plan are based on the performance of our peers. Our long-term incentive plan is based on total shareholder return relative to our Performance Peer Group and the S&P Industrials. For each plan, we have selected metrics that drive shareholder value and measure our performance against our competitors. The Compensation Committee oversees our executive compensation and benefit programs. The Compensation Committeeprograms and is guided by the following principles: | | ▪ | Pay for Performance:Performance | • Incentive plans are based on peer-benchmarked performance metrics. | | | Leadership Retention and Succession | • Compensation is designed to be competitive within our industry and retentive. | • Programs are designed to motivate and reward NEOs for delivering operational and strategic performance over time. | | | Sustained Performance | • Our annual incentive plan includes both financial and non-financial metrics to ensure we are building a strong foundation for long-term shareholder value. | | | Alignment with Shareholder Interests | • Our compensation structure places an appropriate amount of compensation at risk. | • At-risk compensation is based on peer-benchmarkedfinancial and non-financial performance metrics for our incentive plans, designed to drive superior resultsmeasures and relative to our defense industry peers. Compensation levels are variable based on performance compared to established goals. The variable compensation structure rewards superior performance, penalizes below-average performance and has a relatively flat reward for average performance. Our goal is to achieve and reward top quartile performance.TSR. |
| • A significant portion of compensation is delivered in equity, the value of which provides alignment with shareholder returns. | ▪• Stock ownership guidelines, holding requirements for equity awards and our recoupment policy further align executive and shareholder interests. | | | Benchmarking | Benchmarking:• We evaluate our compensationCompensation programs and financial objectives are evaluated on an annual basis and modify themare modified in accordance with industry and business conditions. When defining key operational (annual) and strategic (long-term) performance metrics, we
| • We seek to outperform our peers (a group of nine aerospace and defense companies we refer to as the "Performance Peer Group"). The Performance Peer Group includes companies that we believe most accurately reflect our business; however, some in our industry cannot be utilized for compensation benchmarking because comparable compensation data is not available for foreign exchange-registered companies. The Compensation Committee analyzes the broader market for executive compensation using | • We use a "Target Industry Peer Group" for broader market executive compensation analyses that includes the U.S.-based companies in the Performance Peer Group, as well as additional companies based on a peer-of-peers analysis. The Compensation Committee also considers general industry data on Fortune 50 to Fortune 150 companies for an understanding of current executive compensation practices. |
| | ▪ | 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 our 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.
|
| Risk Management | ▪ | Align Pay Programs with Shareholder Interests:• The Compensation Committee supports a compensation structure that places an appropriate level of compensation at risk, based on our financial and non-financial performance measures and relative TSR. The annual compensation incentive award is determined by our financial performance and is subject to a downward only adjustment for performance against non-financial goals. For NEOs, the value of LTI RPSR compensation is determined by relative TSR performance. 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. Stock ownership guidelines and holding requirements for equity awards further align executive and shareholder interests.
|
| | ▪ | Ensure 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 Company's 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 Company's risk profile on an ongoing basis, in part to mitigate concerns of executives being overly incentivized to achieve near-term stock price growth. In addition to using long-term incentive awards as a significant portion of annual total direct compensation ("TDC"), design features such as overlapping three-year cliff-vested grants, three-year holding periods and ownership guidelines are designed to align management's long-term interests and mitigate risks.
| • Both the Compensation Committee and its independent compensation consultant evaluate the mix of at-risk compensation linked to stock appreciation. | • The Compensation Committee regularly reviews the design of our compensation program to assess risk. The Compensation Committee has determined the risk profile is appropriate and has incorporated substantial risk management features into the compensation program, including overlapping three-year cliff vested grants, capped payouts, three-year holding periods and ownership guidelines, combined with a policy that allows for the recoupment of short and long-term incentive payments. |
We aspire to lead our industry in sustainable performance with strong, enduring values. Our incentive plans utilize peer-based metrics for both the annual and long-term incentive plans. For each plan, we have selected metrics that drive shareholder value and measure our performance against our competitors.NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENTI 31
HOW WE MAKE COMPENSATION DECISIONS | | COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES
|
| | | How We Make Compensation Decisions |
Role of the Compensation Committee The Compensation Committee is responsible for overseeing our compensation policies and programs and 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 the compensation for the other NEOs. Among its duties, the Compensation Committee also:Committee: | | ▪ | reviews market data and other input from its independent compensation consultant; |
| | ▪ | reviews and approves incentive goals and objectives relevant to elected officer compensation. For the CEO, the goals and objectives are set by the independent directors; |
reviews market data and other input from its independent compensation consultant; reviews and approves incentive goals and objectives (CEO goals and objectives are set by the independent directors); evaluates and approves executive benefit and perquisite programs; and evaluates the competitiveness of each elected officer's total compensation package. 32INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENT
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES
|
| | ▪ | evaluates and approves executive benefit programs and perquisites; and |
| | ▪ | evaluates the competitiveness of each elected officer's total compensation package. |
For more information regarding the duties and responsibilities of the Compensation Committee and the composition of the Compensation Committee and its duties and responsibilities, see "Corporate Governance – Committees of the Board of Directors – Compensation Committee." The Compensation Committee's charter can be found on the Investor Relations section of our website (www.northropgrumman.com)(www.northropgrumman.com).
Role of the Independent Compensation Consultant The Compensation Committee retains an independent compensation consultant, Frederic W. Cook & Co. (the "Compensation Consultant")Compensation Consultant). 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 regularly attends meetings of the Compensation Committee 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 the compensation actions for the NEOs. The Compensation Consultant regularly meetsmay meet in executive session with the Compensation Committee. 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 the Company, except for $6,900 received for our purchase of industry compensation surveys from the Compensation Consultant.Company. The Compensation Consultant's role is to provide an independent review of market data and to advise the Compensation Committee on the levels and structure of our executive compensation policies and procedures including compensation matters for NEOs. The Compensation Consultant utilizes aerospace and defense industry market data supplied by Aon Hewitt 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. |
reviewing our total compensation philosophy, peer groups and target competitive positioning and advising the Compensation Committee; identifying market trends and practices and advising the Compensation Committee on such trends and practices; providing 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 serving as a resource to the Compensation Committee Chairperson on setting agenda items for Compensation Committee meetings and undertaking special projects. In February 2013,2014, the Compensation Committee determined that there were no relationships between the Compensation Consultant and the Company or any of the Company's directors or executive officers that raise a conflict of interest.
Role of Management Our CEO makes compensation-related recommendations for elected officers to the Compensation Committee for its review and approval based on the CEO's reviewevaluation of each officer's compensation relative to market and the overall framework, philosophy and objectives for our executive compensation programs set by the Compensation Committee. The CEO does not make any compensation recommendations for himself to the Compensation Committee. The recommendations for elected officers are based on an assessment of each executive's performance, skills and industry knowledge, as well as succession and potential retention risks. The Chief Human Resources Officer regularly provides tally sheets to the Compensation Committee that summarize the total compensation and benefits for each NEO. These tally sheets are
32INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES
|
provided to the Compensation Committee to ensure that compensation decisions are made within our total compensation framework. The valuevalues of nonqualified deferred compensation, outstanding equity awards, health and welfare benefits, pension benefits and perquisites are also is included. Management also provides recommendations to the Compensation Committee regarding 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.
The Compensation Committee uses a Performance Peer Group, consisting of nine competitor companies in the aerospace and defense market in the U.S. and Europe, to set annual performance targets and evaluate performance for the purpose of award payments under our incentive plan. In addition, the Compensation Committee uses a Target Industry Peer Group, comprised of 14 companies, to benchmark executive compensation levels and practices. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENTI 33
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES
|
Performance Peer Group to Set Performance Targets and Evaluate Performance The Compensation Committee uses a Performance Peer Group, using metrics based on peer performance, for purposes of administering our annual and long-term incentive plans. For 2012,2013, the Performance Peer Group consisted of the following companies: | | | | | | | | | | | PERFORMANCE PEER GROUP | BAE SystemsAirbus Group* | | | | Finmeccanica | | | | Lockheed Martin Corporation | The Boeing CompanyBAE Systems | | | | General Dynamics Corporation | | | | Raytheon Company | EADSThe Boeing Company | | | | L-3 Communications Holdings, Inc. | | | | SAIC, Inc.** | | * Formerly known as EADS. | | **On September 27, 2013, SAIC, Inc. (SAI) spun off its services business into Science Applications International Corporation and renamed the parent company Leidos Holdings, Inc., both publicly traded companies. The legacy SAI publicly traded company no longer exists in its prior form. We combined the two publicly traded components, Science Applications International Corporation and Leidos Holdings, Inc., as a proxy for the legacy company, to calculate an implied SAI TSR for outstanding LTIP grants awarded in 2011. |
Target Industry Peer Group to Benchmark Executive Compensation Practices The Target Industry Peer Group is comprised of 14 companies, including the sixthose in the Performance Peer Group that are SEC registrantsU.S.-based (Boeing, General Dynamics, L-3 Communications, Lockheed Martin, Raytheon and the former SAIC). To identify companies in addition to the six aerospace and defense peers for compensation benchmarking purposes, the Compensation Consultant employed a methodology that considered a company a peer if theyit met the following criteria: | | ▪ | the company was identified as a peer by at least three of the six aerospace and defense peers; |
| | ▪ | the company participates in the annual Aon Hewitt executive compensation study; and |
| | ▪ | revenues and market capitalization of the company were approximately 1/3 to three times that of Northrop Grumman. |
the company was identified as a peer by at least three of the six aerospace and defense peers or proxy advisory services; the company participated in the annual Aon Hewitt executive compensation study; and revenues, total employees, and market capitalization of the company were broadly similar to those of Northrop Grumman. While the Target Industry Peer Group is reviewed annually by the Committee's Compensation Consultant, our goal is to keep it as consistent as possible on a year-over-year basis. The Target Industry Peer Group used for compensation decisions in 2012 was2013 included 12 of the same as14 companies that were included in the 20112012 peer group. Two companies, ITT Corporation and Goodrich Corporation, were removed due to ITT Corporation spinning off its defense and information unit and Goodrich Corporation being acquired by United Technologies. The companies that comprise the Target Industry Peer Group are listed in the table below: | | | | | | 2012 TARGET INDUSTRY PEER GROUP | | 3M Company | | | | ITT Corp.L-3 Communications Holdings, Inc. | | The Boeing Company | | | | Johnson Controls, Inc.Lockheed Martin Corporation | | Caterpillar, Inc. | | | | L-3 Communications Holdings, Inc.Raytheon Company | | Emerson Electric Company | | | | Lockheed Martin Corp.Rockwell Collins, Inc. | | General Dynamics Corporation | | | | Raytheon Company | Goodrich, Corp. | | | | SAIC, Inc.* | | Honeywell International, Inc. | | | | Textron, Inc. | | Johnson Controls, Inc. | | | | United Technologies Corp.Corporation | | * Refers to the former SAIC, Inc. as it was before the spin-off of its services business. |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENTI 33
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES
|
It is the Company's pay philosophy to benchmarkprovide the CEO a compensation package which comprises competitive elements of base salary and target variable pay elements for the CEOrelative to levels approximating the revenue size-adjusted median of the Target Industry Peer Group for target performance. TheGroup. In 2013, the CEO's base salary is slightly above median and his target annual incentive is slightly below median, resulting ineach approximated the median. As a result, the CEO's target total cash compensation aroundalso approximated the median of the Target Industry Peer Group. The CEO's long-term incentive grant in 20122013 was below median, resulting in target total direct compensation below median. The Another element of the Company's pay philosophy is to tie a significant portion of the CEO's pay to performance. As a result, the CEO's actual compensation may differ from this market median based on the Company's actual performance. In determining the base salary and target variable pay elements for the other NEOs, the Compensation Committee does not set any specific benchmark relative to the Target Industry Peer Group; rather, the Compensation Committee considers several factors in determining their compensation, including executive compensation levels and practices of the Target Industry Peer Group, NEO individual experience, growth in job as demonstrated through sustained performance, leadership impact, retention risk and pay relative to the CEO. Actual annual incentive awards and long-term incentive award opportunities reflect these factors, as well as Company and business performance. 34 I NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS
|
Selection of Performance Criteria As discussed earlier, for purposes of measuring performance we use the Performance Peer Group to establish key financial goals benchmarked against our industry.
Our objective in selecting performance goals for the annual incentive plan and long-term incentive plan is to establish metrics that enhance shareholder value, while complementingcomplement one another in support of strong Company performance, over the longer term.and balance annual and long-term results. For the annual incentive plan,As mentioned, we use a mix of financial and non-financial metrics to measure our performance. The following financial metrics were selected for 2012:
| | ▪ | New Business Awards: focuses the Company on maintaining optimal market share and represents the total new program/contract authorizations awarded to the Company during the year. Recognizing the importance of keeping current programs sold, new business awards are subject to a negative backlog score adjustment for substantial program terminations. |
| | ▪ | Pension-Adjusted Operating Margin Rate: establishes high performance expectations for the Company and is calculated as OM rate (OM divided by sales) adjusted for net FAS/CAS pension income or expense. The net FAS/CAS pension adjustment is the difference between pension expense determined in accordance with GAAP under Financial Accounting Standards ("FAS") and pension expense allocated to the business segments under U.S. Government Cost Accounting Standards ("CAS"). The Compensation Committee may increase the OM rate score by a maximum of five percentage points if the actual Pension-Adjusted OM rate is equal to or above target and minimal charges were recorded, or it can decrease the score by up to five percentage points if significant charges were recorded and the target Pension-Adjusted OM rate was not achieved. |
| | ▪ | Free Cash Flow Conversion: focuses on the quality of net earnings and is calculated as free cash flow from continuing operations before the after-tax impact of discretionary pension contributions divided by net income from continuing operations. |
In addition to the financial goals, non-financial goals have been established to align our objectives with customers, shareholders and employees. Performance against non-financial metrics can only result in downward adjustment to the financial metric score. The following non-financial metrics were selected:
| | ▪ | Customer Satisfaction: measured in terms of customer feedback, including customer-generated performance scores, award fees and verbal and written feedback. |
| | ▪ | Quality: measured using program-specific objectives within each of our sectors, including defect rates, process quality, supplier quality, planning quality and other appropriate criteria for program type and phase. |
| | ▪ | Engagement: measured in terms of progress (as reported by employees in a company-wide engagement survey) against engagement action plans and maintaining or improving the overall engagement score. |
| | ▪ | Diversity: measured in terms of improving representation of females and People of Color in mid-level and senior-level management positions with respect to peer and broader industry benchmarks. |
| | ▪ | Safety: measured by Total Case Rate, defined as the number of Occupational Safety & Health Administration recordable injuries as well as by Lost Work Day Rate associated with those injuries. |
| | ▪ | Environmental Sustainability: measured in terms of the reduction, in metric tons, of greenhouse gases emissions and solid waste and water. |
To further enhance shareholder value over time, the Long-Term Incentive Stock Plan for our NEOs utilizes a relative TSR metric measured against the Performance Peer Group and the S&P Industrials. TSR measures cumulative stock price appreciation with reinvestmentto establish key financial goals benchmarked against our industry for purposes of dividends over a three-year period. To normalize for any potential significant change in the stock price at the beginning or the end of the three-year measurement period, the TSR calculation is based on the average of the last 30 calendar days of the measurement period. The plans are discussed in more detail below.measuring performance.
Determination of
| | | Annual Incentive Compensation |
Under our shareholder-approved 2002 Incentive Compensation Plan (the "Plan")Plan), the Compensation Committee approves the annual incentive compensation target payout percentage for each NEO. For the CEO, it is setapproved by the independent directors. The Compensation Committee applies the process detailed above to set incentive compensation levels for NEOs. The target incentive award ("Target Bonus")(Target Bonus) represents a percentage of each NEO's base salary. Following the completion of the fiscal year, the Target Bonustarget bonus is used by the Compensation Committee, together with its assessment of Company performance against pre-determined performance criteria, to determine the final bonus award amount.
20122013 Annual Incentive TargetsPlan
| | | | | | Name | | Target Payout
% of Salary
| | Payout Range
% of Salary
| Wesley G. Bush | | 150% | | 0% - 300% | James F. Palmer | | 100% | | 0% - 200% | Gary W. Ervin | | 100% | | 0% - 200% | James F. Pitts | | 100% | | 0% - 200% | Linda A. Mills | | 100% | | 0% - 200% |
For 2012,2013, Mr. Bush's Target BonusBush had a target bonus of 150% of base salary, which was unchanged from 2011.2012. The 2013 target bonus, as a percentage of salary, was also unchanged from 2012 Target Bonus for the other NEOs was increased from 75% in 2011 to 100%, while base salaries were frozen, to increase the percentage of pay- NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENTI 35
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTSOF OUR PROGRAMS
|
at-risk, further aligning executives' compensation to shareholder interests.NEOs.
The Final Bonus Awardfinal bonus award for each NEO was determined by multiplying the Northrop Grumman Company Performance Factor ("CPF")(CPF) by the Target Bonus.target bonus. Within the annual incentive formula described below, the CPF can range from 0% to 200%. Annual incentive formula for 2012:2013: Base Salary x Target Payout % = Target Bonus Target Bonus x CPF = Final Bonus Award The annual incentive payments are designed to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code (the "Code").Code. As a result, the terms of the Plan provide that the maximum potential individual incentive compensation award for a performance year for an officer subject to Section 162(m) shall be limited. Actual payouts for the 20122013 performance year were less than the limits set forth under the Plan. At the end of each year, the CEO conducts an annual performance evaluation for each NEO, other than himself, and then reviews the evaluation with the Compensation Committee. The Compensation Committee reviews Company performance information, as well as the comparison to market data. The Compensation Committee approves bonus amounts for all NEOs, subject to ratification by the independent members of the Board with respect to the CEO's bonus. The Compensation Committee has full discretion to make adjustments to the annual bonus payout if it determines such adjustment is warranted. For example, in instances where Company performance has been impacted by unforeseen or unusual events (natural disasters, significant acquisitions or divestitures, etc.), the Compensation Committee has exercised its authority to increase the final awards (subject to limitations under Section 162(m) of the Internal Revenue Code). The Compensation Committee has also adjusted payouts downward in the past despite performance targets having been met when it determined that particular circumstances had a negative impact on the Company but were not reflected in the performance calculation. For 2012,2013, no adjustments were made. 2012
2013 Annual Incentive Goals and Results For the annual incentive plan, we use a mix of financial and non-financial metrics to measure our performance. The CPFfollowing financial metrics were selected for 2013: Pension-adjusted OM Rate: establishes high performance expectations for the Company and is calculated as OM rate (operating margin divided by sales) adjusted for net FAS/CAS pension income or expense. The net FAS/CAS pension adjustment is the difference between pension expense determined basedin accordance with GAAP under Financial Accounting Standards (FAS) and pension expense allocated to the business segments under U.S. Government Cost Accounting Standards (CAS). Free Cash Flow Conversion: focuses on the quality of net earnings and is calculated as free cash flow provided by operating activities before the after-tax impact of discretionary pension contributions divided by net income from continuing operations. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENTI 35
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTSOF OUR PROGRAMS
|
Awards (Book-to-bill): focuses the Company on maintaining market share and represents the total new contracts awarded to the Company during the year, net of backlog adjustments, divided by sales during the year. Pension-adjusted Net Income: reflects an integrated metric for both top and bottom line performance and is calculated as net income adjusted for net FAS/CAS pension income or expense after taxes. The net FAS/CAS pension adjustment is the difference between pension expense determined in accordance with GAAP under Financial Accounting Standards (FAS) and pension expense allocated to the business segments under U.S. Government Cost Accounting Standards (CAS). In addition to the financial goals, non-financial goals have been established to align our objectives with customers, shareholders and employees. Performance against non-financial metrics can result only in downward adjustment to the financial metric score. The following non-financial metrics were selected: Customer Satisfaction: measured in terms of customer feedback, including customer-generated performance scores, award fees and verbal and written feedback. Quality: measured using program-specific objectives within each of our sectors, including defect rates, process quality, supplier quality, planning quality and other appropriate criteria for program type and phase. Engagement: measured in terms of progress (as reported by employees in a company-wide engagement survey) against engagement action plans and maintaining or improving the overall engagement score. Diversity: measured in terms of improving representation of females and People of Color in mid-level and senior-level management positions with respect to peer and broader benchmarks. Safety: measured by Total Case Rate, defined as the number of Occupational Safety & Health Administration recordable injuries as well as by Lost Work Day Rate associated with those injuries. Environmental Sustainability: measured in terms of the reduction, in metric tons per sales, of greenhouse gas emissions, and reduction of solid waste and water utilization. The Company's achievement of financial goals. The three financial metrics measure the value of new business awards, Pension-Adjusted OM Rate and FCF conversion. Thesefour financial metrics are used to determine the CPF value. Performance against the six non-financial goals cannot be used to adjust the CPF upward and can result only in a downward adjustment to the financial metric score if targets are not achieved. For 2012,2013, the Compensation Committee determined that the aggregate performance against the non-financial metrics achieved targets, and, consequently, there was no reduction to the CPF. For the NEOs, our past practice of using an "individual performance" factor in determining the final bonus award has been eliminated. All NEOs received final bonus awards determined only by the CPF. Our annual incentive plan provides for payout levels at 0% to 200% of target. The minimum, target with specificand maximum performance levels are derived based on an analysis of the past performance of our Performance Peer Group. Specific values are identified for the metricseach metric at selected points in the non-linear range and other values determined by interpolation between these points. No payout is made if performance is below the minimum. No above-target payout is earned unless the Company’s performance exceeds the performance threshold noted in the table below. The 0% payout represents the minimum acceptable level of performance, while themaximum 200% payout is intended to represent top-quartile performance.based upon the top past performance of the Performance Peer Group. This structure rewards superior performance penalizesthrough increased performance thresholds to achieve annual target and maximum compensation and provides reduced awards for below average performance. Based on Company performance and has a relatively flat reward for average performance. the four financial metrics shown in the table below, the CPF was 144%.
| | | | | | | | Metric/Goal | Weighting | | Performance Threshold to be Achieved In Order To Exceed Target | | 2013 Performance | | Pension-adjusted OM Rate | 35% | | 10.8% | | Exceeded Target | | Free Cash Flow Conversion | 35% | | 113% | | Exceeded Target | | Awards (Book-to-bill) | 15% | | 1.00 | | Below Target | | Pension-adjusted Net Income | 15% | | $1.6B | | Exceeded Target |
36 I NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS
|
Based on Company performance for the three financial metrics shown in the table below, the CPF was 183%. The Compensation Committee determined that the non-financial metrics would only be used to reduce the final CPF if performance on the non-financial metrics was below target. Company performance exceeded the aggregate non-financial targets for 2012, and did not impact the CPF. Based on the overall assessment of the Company, the Compensation Committee approved a final CPF of 183%.
| | | | | | | | | | | | | | | | | | Metric/Goal | Weighting | | Minimum Performance 0% | | 65% | | 90% | | Target Performance 100% | | 135% | | Maximum Performance 200% | | 2012 Actual Performance | | New Business Awards | 20% | | $18.0 | | $20.0 | | $22.0 | | $23.0 | | $25.0 | | $28.0 | | $26.5 | | Negative Backlog CPF Score Adjustment | | | | | | | | | | | | | | 0% | | Pension-Adjusted OM Rate | 40% | | 8.5% | | 9.0% | | | | 10.0% | | 10.5% | | 12.0% | | 11.9% | | Risk Management CPF Score Adjustment | | 5% | | FCF Conversion | 40% | | 80% | | 90% | | 100% | | 105% | | 115% | | 140% | | 126% |
Decisions for 20122013 Mr. Bush
In February 2013,2014, the Compensation Committee applied the CPF to Mr. Bush's Target Bonus.target bonus. Based on the CPF, in February 2013,2014, the Committee recommended, and the independent members of our Board of directors approved, a 20122013 annual incentive award of $4,117,500$3,240,000 for Mr. Bush, which was comparable to his 2011 annual incentive award of $4,027,500. Other NEOs
Bush. Based on the CPF, the CEO recommended, and the Compensation Committee approved, the followingNEOs' annual incentive awards for each of the other NEOs:awards. | | | Name | 2012 Annual Incentive ($)* | | Target Payout % of Salary | | Payout Range % of Salary | | Actual Payout % of Salary | | Actual Payout* | | Wesley G. Bush | | | 150% | | 0% - 300% | | 216% | | $3,240,000 | | James F. Palmer | $ | 1,560,000 |
| | 100% | | 0% - 200% | | 144% | | $1,224,000 | | Gary W. Ervin | $ | 1,556,000 |
| | | James F. Pitts | $ | 1,556,000 |
| | | Gloria A. Flach | | | 100% | | 0% - 200% | | 144% | | $1,080,000 | | Linda A. Mills | $ | 1,420,000 |
| | 100% | | 0% - 200% | | 144% | | $1,116,000 | | Thomas E. Vice | | | 100% | | 0% - 200% | | 144% | | $1,080,000 | | * Details on the range of bonuses that could have been payable based on 2013 performance are provided in the Grants of Plan-Based Awards table. Actual bonus payouts for 2013 performance are provided here and in the Summary Compensation Table. | | * Details on the range of bonuses that could have been payable based on 2013 performance are provided in the Grants of Plan-Based Awards table. Actual bonus payouts for 2013 performance are provided here and in the Summary Compensation Table. |
* Details on the range of bonuses that could have been payable based on 2012 performance are provided in the "Grants of Plan-Based Awards" table. Actual bonus payouts for 2012 performance are provided here and in the "Summary Compensation Table."
| | | Long-Term Incentive Compensation |
2013 Long-Term Incentive Compensation Decisions for 2012Program
In determining the amount of individual long-term incentive awards, the Compensation Committee considers an executive officer's individual performance during the preceding year, growth in job as demonstrated through sustained performance, leadership impact, retention risk and pay relative to the CEO, as well as market data for the executive officer's position based on the Target Industry Peer Group analysis discussed above.analysis. In 2012,2013, after determining the award value for the NEOs based on the market data and individual factors as described above, the Compensation Committee granted 70% of the value in the form of RPSRs and 30% in the form of RSRs to provide retention value to ensure sustainability and achievement of business goals over time. The Committee determined that this long-term incentive mix would appropriately motivate and reward the NEOs to achieve our long-term objectives and further reinforce the link between their interests and the interests of our shareholders. The RSRs vest 100% after three years. The RPSRs are paid following the completion of the 2013-2015 performance period 2012-2014.period. The RSRs vest 100% after three years. For the 20122013 grant, dividends accrue on both RPSR and RSR awards earned and will be paid upon payment of the RPSR or RSR. The Compensation Committee evaluates RPSR performance requirements each year to ensure they are aligned with our objectives. For the 20122013 grant, the Compensation Committee reviewed the performance metrics and determined that for the NEOs, performance would continue to be measured in terms of relative TSR as it provides the most direct line of sight to shareholder value creation. TSR is measured by comparing our share performancecumulative stock price appreciation with reinvestment of dividends over a three-year period to the Performance Peer Group (50% of award) and to the S&P Industrials (50% of award), which comprises companies within the S&P 500 classified as Industrials, reflecting the range of similar investment alternatives available to our shareholders. To smooth volatility in the market, the TSR calculation is based on the average of the 30 calendar days immediately prior to the start of the performance period and the last 30 calendar days of the performance period. Beginning with 2012 grants, we reduced the maximum payout from 200% to 150% of the original award granted. Shares that are paid out under an RPSR award granted to the executive in 20122013 can vary from 0% to 150% of the original RPSR award granted. The vesting percentagemaximum payout is capped at 100% if the absolute TSR is negative, even if the relative TSR would have resulted in a higher score. RPSR awards may be paid in shares, cash or a combination of shares and cash.cash; however, we have chosen to pay our awards in shares. | | | | | | | | | | | Weight | | Relative TSR Percentile | | RPSRs Earned | | | | 0% | 100% | 150% | | S&P Industrials | | 50% | | 25th | 50th | 80th | | Target Performance Peer Group | | 50% | | 25th | 50th | 80th |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT I 37
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS
|
Recently Completed RPSR Performance Period (2010(2011 – 2012)2013) In February 2010,2011, when granting RPSRs, the Compensation Committee selected relative TSR as the performance metric for the awards and established the performance criteria in the table below. In February 2013,2014, the Compensation Committee reviewed performance for the January 1, 20102011 to December 31, 20122013 RPSR performance period. | | | | | Percentile Required to Score | | | Percentile Required to Score | | | Metric/Goal | | Weighting | | 0% | | 100% | | 200% | | 2012 Actual Performance | | Weighting | | 0% | | 100% | | 200% | | 2013 Actual Performance * | | Relative TSR - Performance Peer Group | | 50% | | 25th | | 50th | | 80th | | 89th | | 50% | | 25th | | 50th | | 80th | | 56th | | Relative TSR - S&P Industrials | | 50% | | 25th | | 50th | | 80th | | 56th | | 50% | | 25th | | 50th | | 80th | | 85th | | * Due to SAIC, Inc. (SAI) spinning off its services business, we combined the two publicly traded components, Science Applications International Corporation and Leidos Holdings, Inc., as a proxy for the legacy company, to calculate an implied SAI TSR for outstanding LTIP grants awarded in 2011. | | * Due to SAIC, Inc. (SAI) spinning off its services business, we combined the two publicly traded components, Science Applications International Corporation and Leidos Holdings, Inc., as a proxy for the legacy company, to calculate an implied SAI TSR for outstanding LTIP grants awarded in 2011. |
Performance ResultsDecisions for 2013
Based on 20102011 - 20122013 TSR performance, we ranked secondfifth against the Performance Peer Group and were in the 89th56th percentile. We were in the 56th85th percentile of the S&P Industrials. The combined weighted score generated an overall performance score of 160%159%. In early 2013,2014, the NEOs received payouts in stock with respect to the performance awards that were granted in February 20102011 for the three-year performance period ending December 31, 2012.2013. These awards were paid at 160%159% of the target number of shares initially awarded.
This section describes other benefits the NEOs receive. These benefits are non-performancenot performance related and are designed to provide a competitive package for purposes of attracting and retaining the executive talent needed to achieve our business objectives. These benefits include retirement benefits, certain perquisites and severance arrangements.
Retirement Benefits We maintain tax-qualified retirement plans (both defined benefit pension plans and defined contribution savings plans) that cover most of our workforce, including the NEOs. We also maintain nonqualified retirement plans that are available to certain of our executives,NEOs, which are designed to restore benefits that were limited under the tax-qualified plans or to provide supplemental benefits. Compensation, age and years of service factor into the amount of the benefits provided under the plans. Thus, the plans are structured to reward and retain employees of long service and recognize higher performance levels as evidenced by increases in annual pay. Additional information about these retirement plans and the NEO benefits under these plans can be found in the Pension Benefits Table and Nonqualified Deferred Compensation Table. Some of the plans were assumed in acquisitions, and participants may be legally or contractually entitled to accrued benefits. Nevertheless, we periodically assess the cost and benefits of the plans, as well as competitive developments, and have frozen a number of the plans. The defined benefit nonqualified supplemental retirement plans have been frozen effective December 31, 2014, and all retirement plans have been amended to freeze final average pay as of December 31, 2014. Although the NEOs may receive
benefits from different plans due to plan and legal requirements, the Compensation Committee assesses aggregate benefits available to the NEOs and has previously imposed an overall cap, generally limited to no more than 60% of final average pay, on pension benefits for the NEOs (subject to(except for small variations due to contractual restrictions under the plans). Each NEO's total pension benefit under all pension plans combined is generally limited to no more than 60% of his or her final average pay. Mr. Bush voluntarily agreed to reduce his cap to 50% of final average pay. In addition, the defined benefit nonqualified supplemental retirement plans in which our NEOs participate have been amended to freeze pay and service as of December 31, 2014.
We maintain a retiree medical plan for certain NEOs.
Retiree Medical Arrangement The planSpecial Officer Retiree Medical Plan (SORMP) was closed to new entrantsparticipants in 2007. Additional information about this plan can be foundNEOs who are vested participants in the Retiree Medical Arrangement sectionSORMP are entitled to retiree medical benefits pursuant to the terms of the tables that follow this CD&A, adjacent toSORMP. The coverage is a continuation of the NEO's executive medical benefits plus retiree life insurance. A participant becomes vested if he or she has either five years of vesting service as an elected officer or 30 years of total service with the Company and its affiliates. A vested participant can commence SORMP benefits at retirement before age 65 if he or she has attained age 55 and 10 years of service. The estimated cost of the SORMP benefit reflected in the Termination Payment Tables.Table is the present value of the estimated cost to provide future benefits using actuarial calculations and assumptions. Ms. Mills, Mr. Vice and Ms. Flach are not eligible for SORMP benefits. 38INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTSOF OUR PROGRAMS
|
Perquisites Our NEOs are eligible for certain limited executive perquisites that include financial planning, income tax preparation, physical exams and personal liability insurance. While almost all other executive perquisites have been eliminated, the Compensation Committee believes the remaining perquisites are common within the competitive market for total compensation packages tofor executives and are useful in attracting, retaining and motivating talented executives. Perquisites provided to the NEOs in 20122013 are detailed in the Summary Compensation Table. Use of Company Aircraft
In 2004, the Board of Directors determined that the CEO should avoid traveling by commercial aircraft for purposes of security, rapid availability and communications connectivity during travel. The Board of Directors has since directed that the CEO utilize Company-provided aircraft for all travel. Throughout the year, if the CEO uses Company-provided aircraft for personal travel, the costs for such travel are imputed as income and subject to the appropriate tax reporting according to Code regulations.
Security Arrangements Given the nature of our business, we maintain a comprehensive security program. As a component of that program, we provide certain officers and directors 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
38INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENT
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTSOF OUR PROGRAMS
|
industry in general and security risks specific to our Company and theits individuals. 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 and certain NEOs receive varying levels of residential and travel protection. 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. The Board has determined that the CEO should avoid traveling by commercial aircraft for purposes of security, rapid availability and communications connectivity during travel, and should use Company-provided aircraft for all air travel. If, as a result, the CEO uses Company-provided aircraft for personal travel, the costs of such travel are imputed as income and are subject to the appropriate tax reporting according to Internal Revenue Code regulations. For 2013, Mr. Bush reimbursed the Company for a portion of the security perquisite associated with personal use of the aircraft by him and his family members in an aggregate amount that reflects the estimated value of income imputed to Mr. Bush under Internal Revenue Code regulations. 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.
Severance and Change in Control Benefits We maintain a severance plan that is available forto our NEOs who qualify and are approved to receive such treatment.benefits. The purpose of the severance plan is to help bridge the gapsgap in an executive's income and health coverage during a period of unemployment following termination. Mr. Bush is not covered by, or eligible for, any benefits under any Company severance plan or policy. We do not maintain any individual change in control agreements or change in control severance plans. In addition, we do not provide excise tax gross-ups for any payments received upon termination after a change in control. Additional information on the benefits provided under our severance plans is provided in the section "2012 Severance Program" and in the Potential Termination Payment tables.
Mr. Ervin's Retirement and Separation Agreement
In July 2012, we entered intoUpon a Retirement and Separation Agreement (the "Separation Agreement") with Mr. Ervin. Under the terms of the Separation Agreement, Mr. Ervin remained with"qualifying termination" (defined below) the Company inwill provide severance benefits to eligible NEOs under the Severance Plan for Elected and Appointed Officers of Northrop Grumman Corporation (the Severance Plan). Provided the NEO signs a non-executive officer capacity from January 1, 2013 until his retirement effective February 28, 2013release, he or she will receive: (i) a lump sum severance benefit equal to assist with the transition to the new sector leadership. For this period, Mr. Ervin received hisone and one-half times annual base salary and target bonus, (ii) a transition projectpro-rated performance bonus, (iii) continued medical and special incentive bonus indental coverage for the amountseverance period, (iv) income tax preparation/financial planning fees for the year of $2.5 million. This bonus, in recognitiontermination and the following year and (v) outplacement expenses up to 15% of his contributionssalary, all subject to management approval. The cost of providing continued medical and dental coverage is based upon current premium costs. The cost of providing income tax preparation and financial planning is capped at $15,000 for the Companyyear of termination and $15,000 for his
the year following termination.A "qualifying termination" means one of the following: involuntary termination, other than for cause or mandatory retirement; or service during this period, iselection to terminate in lieu of any bonus otherwise payable for services performed during 2013 or any grant that would otherwise be issued in 2013 pursuantaccepting a downgrade to a non-officer position (i.e., good reason).
Mr. Bush was elected to the Company's long-term incentiveposition of Chief Executive Officer and President effective January 1, 2010. Effective January 1, 2010, Mr. Bush agreed that he would no longer be covered by, or eligible for, benefits under the Severance Plan or under any other severance plan, program or other equity arrangement.policy of Northrop Grumman (for more information, please see the Form 8-K filed December 21, 2009).
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENTI 39
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTSOF OUR PROGRAMS
|
Change in Control Benefits We do not maintain separate change in control programs or agreements. The Separation Agreement provides that Mr. Ervin will continue to vestonly change in his outstanding RPSRs through the remainder of the performance period as set forth in the terms of the RPSR grant agreements. Mr. Ervin will forfeit his unvested RSRs that were granted in 2011 and 2012, but will receive a cash payment equalcontrol benefits available to the value of the forfeited 2011 and 2012 RSR awards based on the Company's closing stock price on July 13, 2012, with such payment to be made within ten days of the end of the vesting period, February 15, 2015. These payments and the other benefits providedNEOs are subject tothose described in the terms and conditions of the Agreement, which include a release2001 Long-Term Incentive Stock Plan (2001 Plan) and a three-year non-compete and non-solicitation provision.the 2011 Long-Term Incentive Stock Plan (2011 Plan).
Stock Ownership Guidelines We maintain Stock Ownership Guidelinesstock ownership guidelines for our NEOs to further promote alignment of management and shareholder interests. These guidelines require that the CEO and other NEOs own Company stock denominated as a multiple of their annual salaries that can be accumulated over a five-year period from the date of hire or promotion into an elected officer position. The Stock Ownership Guidelinesguidelines are as follows: | | | | | Position | | Stock Value as a Multiple of Base Salary | | Chairman, CEO and President | | 7x base salary | | NEOs | | 3x base salary |
Shares that satisfy the stock ownership guidelines include: | | ▪ | Company stock owned outright; |
| | ▪ | RSRs, whether or not vested; and |
| | ▪ | the value of equivalent shares held in the Northrop Grumman Savings Plan or Northrop Grumman Financial Security and Savings Program. |
Company stock owned outright; RSRs, whether or not vested; and the value of shares held in the Northrop Grumman Savings Plan or Northrop Grumman Financial Security and Savings Program. Stock options and unvested RPSRs are not included in calculating ownership until they are converted to actual shares owned. The Compensation Committee reviews compliance with our stock ownership guidelines on an annual basis. In 2012, allAs of December 31, 2013, the CEO and other NEOs were in compliance with their respectivethe ownership guidelines. The Compensation Committee continues to monitor compliance and will conduct a full review again in 2013.2014.
Stock Holding Requirements In February 2010, as discussed above, we implementedWe have a new holding period requirement that became effective for all new long-term incentive grants, awarded beginning in 2010,
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENTI 39
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTSOF OUR PROGRAMS
|
further emphasizing the importance of sustainable performance and appropriate risk-management behaviors. Under this policy, NEOs are required to hold 50% of their net after-tax shares from future RSR vestings, RPSR payments and stock option exercises for a period of three years. These restrictions will generally continue following termination and retirement; however, shares acquired from option exercises or RPSR payments following termination or retirement occurring more than one year after separation from the Company will not be subject to the holding requirement.
Anti-Hedging and Pledging Policy Company policy prohibits our NEOs and other elected officers from engaging in hedging transactions with respect to Company stock or pledging Company stock.
Grant Date for Equity Awards Annual grant cycles for equity awards occur in February at the same time as salary increases and annual incentive grants. This timing allows the Compensation Committee to make decisions on three compensation components at the same time, utilizing a total compensation perspective.philosophy. The Compensation Committee reviews and approves long-term incentive grants during its scheduled meeting.meeting, which generally occurs following announcement of our year-end financial results. Equity grants may also be granted on an interim basis throughout the year for special situations, such as new executive hires, promotions, or retention.
40INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
| | COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTSOF OUR PROGRAMS
|
Tax Deductibility of Pay Section 162(m) of the Internal Revenue Code generally limits the annual tax deduction to $1 million per person for compensation paid to the Company's CEO, CFO and the next three highest-paid NEOs. Qualifying performance-based compensation is not subject to the deduction limit. The Company's annual incentive payments and equity-based incentive compensation are generally designed to qualify as performance-based compensation under this definition and to be fully deductible. Our RSR grants of RSRs are not considered performance-based under Section 162(m) and, as such, may not be deductible. Since the CEO's salary in 20122013 was above the $1,000,000 threshold, a portion of his salary and his perquisites are not deductible by the Company. Executive Compensation Recoupment (Clawbacks)
The Compensation Committee is responsible for evaluating whether any incentive compensation payments based on inaccurate financial results should be recovered by the Company, if:
| | ▪ | the amount or number of shares included in any such payment was calculated based on financial results that were subsequently restated due to noncompliance with any financial reporting requirement under the U.S. securities laws; |
| | ▪ | a lesser payment of cash or shares would have been made based upon the restated financial results; and |
| | ▪ | the payment of cash or shares was received prior to or during the 12-month period following the first public issuance or filing of the financial results that were subsequently restated. |
Say-on-Pay Our shareholders are asked to approve on an annual, advisory basis, the compensation paid to our NEOs. We regularly engage with our shareholders to understand their concerns regarding executive compensation. Our shareholders expressed a preference for full-value shares as they are less dilutive and provide strongstronger alignment with shareholder interests. In 2012, as a result of feedback from our shareholders, the Compensation Committee eliminated the use of stock options and approved a mix of LTI awards to NEOs composed of 70% RPSRs and 30% RSRs.
40INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENTI 41
| | COMPENSATION DISCUSSION AND ANALYSISTABLES | SUMMARY COMPENSATION TABLE
|
20122013 Summary Compensation Table
| | | | | | | | | | | | | | | | | | | | | Name & Principal Position | | Year | | Salary (1) ($) | | Bonus (2) ($) | | Stock Awards (3) ($) | | Option Awards ($) | | Non-Equity Incentive Plan Compensation (4) ($) | | Change in Pension Value and Non- Qualified Deferred Compensation Earnings (5) ($) | | All Other Compensation (6) ($) | | Total ($) | | Wesley G. Bush | | 2012 | | 1,500,120 | | 0 | | 8,000,011 | | 0 | | 4,117,500 | | 8,939,532 | | 1,854,690 | | 24,411,853 | | 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 | | James F. Palmer | | 2012 | | 850,081 | | 0 | | 3,500,023 | | 0 | | 1,560,000 | | 1,707,827 | | 183,098 | | 7,801,029 | | 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 | | Gary W. Ervin | | 2012 | | 850,080 | | 0 | | 6,608,383 | | 0 | | 1,556,000 | | 1,786,657 | | 153,883 | | 10,955,003 | 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 | | James F. Pitts | | 2012 | | 850,081 | | 0 | | 6,488,349 | | 0 | | 1,556,000 | | 2,979,127 | | 164,923 | | 12,038,480 | 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 | | Linda A. Mills | | 2012 | | 775,050 | | 0 | | 4,000,009 | | 0 | | 1,420,000 | | 3,321,233 | | 138,917 | | 9,655,209 | Corporate Vice President and President, Information Systems | | 2011 | | 770,233 | | 0 | | 2,115,147 | | 804,818 | | 1,150,000 | | 2,434,630 | | 230,588 | | 7,505,416 | | | 2010 | | 721,154 | | 0 | | 2,208,350 | | 1,400,034 | | 900,000 | | 1,551,922 | | 265,335 | | 7,046,795 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Name & Principal Position | | Year | | Salary (1) ($) | | Bonus (2) ($) | | Stock Awards (3) ($) | | Option Awards ($) | | Non-Equity Incentive Plan Compensation (4) ($) | | Change in Pension Value and Non- Qualified Deferred Compensation Earnings (5) ($) | | All Other Compensation (6) ($) | | Total ($) | | Wesley G. Bush | | 2013 | | 1,500,023 |
| | 0 | | 8,000,025 |
| | 0 | | 3,240,000 |
| | 4,372,961 |
| | 1,543,403 |
| | 18,656,412 |
| | Chairman, Chief Executive Officer and President | 2012 | | 1,500,120 |
| | 0 | | 8,000,011 |
| | 0 | | 4,117,500 |
| | 8,939,532 |
| | 1,902,181 |
| | 24,459,344 |
| | 2011 | | 1,471,251 |
| | 0 | | 9,400,723 |
| | 3,576,969 | | 4,027,500 |
| | 5,276,169 |
| | 2,510,197 |
| | 26,262,809 |
| | James F. Palmer | | 2013 | | 850,016 |
| | 0 | | 5,499,964 |
| | 0 | | 1,224,000 |
| | 1,210,323 |
| | 182,137 |
| | 8,966,440 |
| | Corporate Vice President and Chief Financial Officer | 2012 | | 850,081 |
| | 0 | | 3,500,023 |
| | 0 | | 1,560,000 |
| | 1,707,827 |
| | 183,098 |
| | 7,801,029 |
| | 2011 | | 845,258 |
| | 250,000 | | 2,350,181 |
| | 894,246 | | 1,250,000 |
| | 1,190,384 |
| | 918,134 |
| | 7,698,203 |
| | Gloria A. Flach (7) | | 2013 | | 738,462 |
| | 0 | | 3,499,980 |
| | 0 | | 1,080,000 |
| | 2,819,117 |
| | 88,309 |
| | 8,225,868 |
| | Corporate Vice President and President, Electronic Systems | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Linda A. Mills | | 2013 | | 775,010 |
| | 0 | | 3,499,980 |
| | 0 | | 1,116,000 |
| | 1,963,264 |
| | 145,064 |
| | 7,499,318 |
| | Corporate VIce President, Operations | 2012 | | 775,050 |
| | 0 | | 4,000,009 |
| | 0 | | 1,420,000 |
| | 3,321,233 |
| | 138,917 |
| | 9,655,209 |
| | 2011 | | 770,233 |
| | 0 | | 2,115,147 |
| | 804,818 | | 1,150,000 |
| | 2,434,630 |
| | 230,588 |
| | 7,505,416 |
| | Thomas E. Vice (7) | | 2013 | | 742,308 |
| | 0 | | 3,499,980 |
| | 0 | | 1,080,000 |
| | 1,501,337 |
| | 397,053 |
| | 7,220,678 |
| | Corporate Vice President and President, Aerospace Systems | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (1) | This column includes amounts that were deferred under the qualified savings and nonqualified deferred compensation plans. |
| | | (2) | In 2011, Mr. Palmer received a recognition bonus for the spin-off of our former shipbuilding business. |
| | | (3) | The dollar value shown in this column is equal to the total grant date fair value of RPSRs and RSRs granted during 2012, as adjusted for Messrs. Ervin and Pitts to provide for vesting following retirement, subject to compliance with a non-compete agreement.the periods presented. The Company did not grant stock options in 2012.2013. For assumptions used in calculating the grant date fair value, see the discussion in Note 14 of the Company's 20122013 Form 10-K, adjusted to exclude forfeitures. The maximum grant date value of the 2012 RPSRs (which awards represent 70% of the total grant) for each NEO, assuming a 150% maximum payout, is as follows: Wesley G. Bush - $9,175,303; James F. Palmer - $4,014,206; Gary W. Ervin - $4,587,652 (excluding the 2012 modification); James F. Pitts - $4,300,884 (excluding the 2012 modification); and Linda A. Mills - $4,014,206. The maximum grant date value of 2012 RPSRs for Messrs. Ervin and Pitts, after giving effect to the modifications noted above is $4,844,747 and $4,563,822, respectively. |
| | | (4) | These amounts were paid pursuant to the Company's annual incentive plan. This column includes amounts that were deferred under the qualified savings and nonqualified deferred compensation plans. |
| | | (5) | The amounts in this column relate solely to the increased present value of the executive's pension plan benefits using mandatory SEC assumptions (see the descriptions of these plans under the Pension Benefits table). There were no above-market earnings in the nonqualified deferred compensation plans (see the descriptions of these plans under the Nonqualified Deferred Compensation table). The amount accrued in each year differs from the amount accrued in prior years due to an increase in service and final average pay (salary and bonus). The change in pension value is also highly 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. |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENTI 41
| | COMPENSATION DISCUSSION AND ANALYSIS | SUMMARY COMPENSATION TABLE
|
increase in service and, if applicable, an increase in final average pay (salary and bonus). The change in pension value is also highly 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 $8,939,532 change in pension value in 2012 for Mr. Bush, approximately $3,000,000 was due to the lower discount rates used in 2012, $4,900,000 was due to the increase in his pay and $1,000,000 was due to an additional year of age and service.
| | | (6) | All Other Compensation amounts include, as applicable, (a) the value of perquisites and personal benefits (b) the amount of tax gross-ups and (c)(b) the amount of Company contributions to defined contribution plans.plans (the Northrop Grumman Savings Plan and the Savings Excess Plan). |
Perquisites and Personal Benefits - Perquisites and other personal benefits provided to certain NEOs include security, travel-related perquisites, including use of Company aircraft or ground transportation services for personal travel and travel and incidental expenses for family members accompanying the NEO while on travel, financial planning/income tax preparation
42INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
| | COMPENSATION TABLES | SUMMARY COMPENSATION TABLE
|
services, insurance premiums paid by the Company on the NEO's behalf and other nominal perquisites or personal benefits (including executive physicals and commemorative gifts). The cost of any category of the listed perquisites and personal benefits did not exceed the greater of $25,000 or 10% of total perquisites and personal benefits for any NEO in 2013, except for the following: (i) for Mr. Bush, costs attributable to security protection ($1,167,970)1,252,874), which includes unbilled prior year costs paid in 2013 and personal travel on Company aircraft consistent with the Company's security program ($400,746)249,178), (ii) for Mr. Palmer, costs attributable to security protectionpersonal travel on Company aircraft ($42,012)27,698), and (iii) for Mr. Pitts,Vice, costs attributable to financial planning/security protection ($235,598) and personal travel on Company aircraft ($48,809). The amount of security costs reported for Mr. Bush has been reduced by $63,923, which reflects the portion for the security perquisite that Mr. Bush reimbursed to the Company related to personal travel on the corporate aircraft for him and his family members. The amount reimbursed reflects the estimated value of income tax preparation in 2011imputed to Mr. Bush under IRS regulations for personal travel on the corporate aircraft by him and 2012 ($30,000).his family members. We determine the incremental cost to us for perquisites and personal benefits based on the actual costs or charges incurred by the Company for the benefits. The Company calculates the value of personal use of Company aircraft based on the incremental cost of each element. 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. As discussed above under "Security Arrangements," the Company provides NEOs with certain residential and personal security protection due to the nature of our business and security threat information. The amounts reflected in the "All Other Compensation" column include expenses for certain 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. Tax Gross-Ups - In certain limited circumstances, we gross-up our NEOs for the income tax on their imputed income resulting from certain perquisites and personal benefits furnished by us. The 2012 amount listed for Mr. Pitts includes a tax gross-up payment on imputed income resulting from a reimbursement of personal travel canceled for business reasons. The amount of the tax gross-up did not exceed $10,000. No other NEO received a tax gross-up in 2012.
Contributions to Plans - In 2012,2013, we made the following contributions to Northrop Grumman defined contribution plans (the Northrop Grumman Savings Plan and Savings Excess Plan): Mr. Bush $221,105,$224,701, Mr. Palmer $83,977, Mr. Ervin $84,003, Mr. Pitts $80,753 and$96,374, Ms. Flach $62,705, Ms. Mills $76,940.$87,738, and Mr. Vice $71,993.
| | | (7) | Ms. Flach and Mr. Vice were not named executive officers for 2011 or 2012; therefore, data for these years is not applicable. |
42INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENTI 43
| | COMPENSATION DISCUSSION AND ANALYSISTABLES | GRANTS OF OF PLANLAN--BBASEDAWARDS TABLE
|
20122013 Grants of Plan-Based Awards
| | | | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards (1) | | Estimated Future Payouts Under Equity Incentive Plan Awards (2)(3) | All Other Stock Awards: Number of Shares of Stock or Units (4) (#) | All Other Option Awards: Number of Securities Underlying Options (2) (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards (2)(5) | | 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 (4) (#) | All Other Option Awards: Number of Securities Underlying Options (2) (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards (2)(5) | Name & Principal Position | Grant Type | Grant Date | Threshold ($) | Target ($) | Maximum ($) | | Threshold (#) | Target (#) | Maximum (#) | | | Name | | Grant Type | Grant Date | Threshold ($) | Target ($) | Maximum ($) | | Threshold (#) | Target (#) | Maximum (#) | All Other Stock Awards: Number of Shares of Stock or Units (4) (#) | All Other Option Awards: Number of Securities Underlying Options (2) (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards (2)(5) | | Wesley G. Bush | Incentive Plan | | 0 |
| 2,250,180 |
| 4,500,360 |
| | | | | Incentive Plan | | 0 |
| 2,250,000 |
| 4,500,000 |
| | | Chairman, Chief Executive Officer and President | RPSR | 2/15/2012 | | | 0 |
| 102,546 |
| 153,819 |
| | | 5,599,993 |
| | | RSR | 2/15/2012 | | | | 40,235 |
| | 2,400,018 |
| | | Wesley G. Bush | | RPSR | 2/20/2013 | | | 0 |
| 100,411 |
| 150,617 |
| | | 5,600,000 |
| | RSR | 2/20/2013 | | | | 36,342 |
| | 2,400,026 |
| | Incentive Plan | | 0 |
| 850,081 |
| 1,700,163 |
| | | | | Incentive Plan | | 0 |
| 850,000 |
| 1,700,000 |
| | | | | Corporate Vice President and Chief Financial Officer | RPSR | 2/15/2012 | | | 0 |
| 44,864 |
| 67,296 |
| | | 2,450,004 |
| | | RSR | 2/15/2012 | | | | 17,603 |
| | 1,050,019 |
| | | Gary W. Ervin | Incentive Plan | | 0 |
| 850,080 |
| 1,700,160 |
| | | | | | Corporate Vice President and President, Aerospace Systems | 2012 RPSR (modification) (6) | 7/19/2012 | | | 0 |
| 31,334 |
| 47,001 |
| | | 2,209,407 |
| | | 2011 RPSR (modification) (6) | 7/19/2012 | | | 0 |
| 4,682 |
| 9,364 |
| | | 399,000 |
| | | RPSR | 2/15/2012 | | | 0 |
| 51,273 |
| 76,910 |
| | | 2,799,997 |
| | | RSR | 2/15/2012 | | | | 20,117 |
| | 1,199,979 |
| | | James F. Pitts | Incentive Plan | | 0 |
| 850,081 |
| 1,700,162 |
| | | | | | Corporate Vice President and President, Electronic Systems | 2012 RPSR (modification) (6) | 7/19/2012 | | | 0 |
| 32,046 |
| 48,069 |
| | | 2,259,611 |
| | | 2011 RPSR (modification) (6) | 7/19/2012 | | | 0 |
| 5,618 |
| 11,236 |
| | | 478,766 |
| | | RPSR | 2/15/2012 | | | 0 |
| 48,068 |
| 72,102 |
| | | 2,624,973 |
| | | RSR | 2/15/2012 | | | | 18,860 |
| | 1,124,999 |
| | | James F. Palmer | | RSR | 9/17/2013 | | | | 20,253 |
| | 1,999,984 |
| | RPSR | 2/20/2013 | | | 0 |
| 43,930 |
| 65,895 |
| | | 2,450,010 |
| | RSR | 2/20/2013 | | | | 15,899 |
| | 1,049,970 |
| | Incentive Plan | | 0 |
| 750,000 |
| 1,500,000 |
| | | | | | Gloria A. Flach | | RPSR | 2/20/2013 | | | 0 |
| 43,930 |
| 65,895 |
| | | 2,450,010 |
| | RSR | 2/20/2013 | | | | 15,899 |
| | 1,049,970 |
| | Incentive Plan | | 0 |
| 775,050 |
| 1,550,100 |
| | | | | Incentive Plan | | 0 |
| 775,000 |
| 1,550,000 |
| | | | | Corporate Vice President and President, Information Systems | RSR | 12/18/2012 | | | | 7,298 |
| | 499,986 |
| | | RPSR | 2/15/2012 | | | 0 |
| 44,864 |
| 67,296 |
| | | 2,450,004 |
| | | RSR | 2/15/2012 | | | | 17,603 |
| | 1,050,019 |
| | | Linda A. Mills | | RPSR | 2/20/2013 | | | 0 |
| 43,930 |
| 65,895 |
| | | 2,450,010 |
| | RSR | 2/20/2013 | | | | 15,899 |
| | 1,049,970 |
| | Incentive Plan | | 0 |
| 750,000 |
| 1,500,000 |
| | | | | | Thomas E. Vice | | RPSR | 2/20/2013 | | | 0 |
| 43,930 |
| 65,895 |
| | | 2,450,010 |
| | RSR | 2/20/2013 | | | | 15,899 |
| | 1,049,970 |
|
| | | (1) | Amounts in these columns show the range of payouts that were possible under the Company's annual incentive plan. The actual bonuses are shown in the Summary Compensation Table column entitled "Non-Equity Incentive Plan Compensation." |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENTI 43
| | COMPENSATION DISCUSSION AND ANALYSIS | GRANTS OF PLAN-BASED AWARDS TABLE
|
| | | (2) | The Company did not grant stock options in 2012.2013. |
| | | (3) | These amounts relate to RPSRs granted in 20122013 under the 2011 Long-Term Incentive Stock Plan. Each RPSR represents the right to receive a share of the Company's common stock upon vesting of the RPSR. The RPSRs are earned based on relative TSR over a three-year performance period commencing January 1, 20122013 and ending December 31, 2014.2015. The payout will occur in early 20152016 and will range from 0% to 150% 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 early retirement, death or disability. The award will fully vest if the executive terminates due to normal retirement. See the Severance Program section for treatment of RPSRs in these situations and upon a change in control. The values reflect the grant value resulting from the modification of the RPSR grants for Messrs. Ervin and Pitts relating to continued vesting of the RPSRs following their retirement from the Company. |
| | | (4) | These amounts relate to RSRs granted in 20122013 under the 2011 Long-Term Incentive Stock Plan. Each RSR represents the right to receive a share of the Company's common stock upon vesting of the RSR. An executive must remain employed through athe 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. Mr. Palmer received a retention grant in September 2013 for which no vesting occurs upon termination due to early or mandatory retirement. Earned RSRs may be paid in either shares, cash or a combination of shares and cash. See the Severance Program section for treatment of RSRs in these situations and upon a change in control. |
| | | (5) | For assumptions used in calculating the grant date fair value per share, see the discussion in Note 14 of the Company's 20122013 Form 10-K, adjusted to exclude forfeitures. |
| | (6) | These amounts relate to the modification of RPSRs that were granted in 2011 and 2012 to provide for vesting following retirement, subject to compliance with a non-compete agreement. Pursuant to SEC rules, these are reported as new grants of the awards. The grant date fair value reported reflects the incremental value of the award immediately after the modification over the fair value immediately before the modification. The fair value of the 2012 RPSRs at their date of grant is reported on a separate line in the table. |
44 I NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT
| | COMPENSATION DISCUSSION AND ANALYSISTABLES | OUTSTANDINGEQUITYAWARDSTABLE
|
Outstanding Equity Awards at 20122013 Fiscal Year End | | | | | | | | | | | | | | | | | | | | | | | | | | Option Awards | | Stock Awards | 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 Plan Awards: Number of Unearned Shares, Units, or Other Rights that Have Not Vested (#) (4) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights that Have Not Vested ($) (3) | | Wesley G. Bush | | 0 |
| 0 |
| 0 |
| 2/15/2012 | | | | 40,235 |
| 2,719,081 |
| 102,546 |
| 6,930,059 |
| Chairman, Chief Executive Officer and President | | 95,620 |
| 191,242 |
| 0 |
| 2/15/2011 | 63.22 |
| 2/15/2018 | | 67,415 |
| 4,555,906 |
| 67,415 |
| 4,555,906 |
| | 0 |
| 228,628 |
| 0 |
| 2/16/2010 | 54.46 |
| 2/16/2017 | | 0 |
| 0 |
| 119,931 |
| 8,104,937 |
| | 183,150 |
| 0 |
| 0 |
| 2/27/2008 | 73.90 |
| 2/27/2015 | | 0 |
| 0 |
| 0 |
| 0 |
| | 70,000 |
| 0 |
| 0 |
| 2/28/2007 | 65.70 |
| 2/28/2017 | | 0 |
| 0 |
| 0 |
| 0 |
| | 59,063 |
| 0 |
| 0 |
| 2/15/2006 | 59.52 |
| 2/15/2016 | 59,063 |
| 0 |
| 0 |
| 0 |
| 0 |
| | James F. Palmer | | 0 |
| 0 |
| 0 |
| 2/15/2012 | | | | 17,603 |
| 1,189,611 |
| 44,864 |
| 3,031,909 |
| Corporate Vice President and Chief Financial Officer | | 23,905 |
| 47,810 |
| 0 |
| 2/15/2011 | 63.22 |
| 2/15/2018 | | 16,853 |
| 1,138,926 |
| 16,853 |
| 1,138,926 |
| | 0 |
| 283,066 |
| 0 |
| 2/16/2010 | 54.46 |
| 2/16/2017 | | 45,938 |
| 3,104,490 |
| 34,562 |
| 2,335,700 |
| | 0 |
| 48,710 |
| 0 |
| 2/16/2010 | 54.46 |
| 2/16/2017 | | 0 |
| 0 |
| 0 |
| 0 |
| | 89,524 |
| 0 |
| 0 |
| 2/27/2008 | 73.90 |
| 2/27/2015 | | 0 |
| 0 |
| 0 |
| 0 |
| | 43,750 |
| 0 |
| 0 |
| 3/12/2007 | 67.50 |
| 3/12/2017 | | 0 |
| 0 |
| 0 |
| 0 |
| | Gary W. Ervin | | 0 |
| 0 |
| 0 |
| 2/15/2012 | | | | 20,117 |
| 1,359,507 |
| 51,273 |
| 3,465,029 |
| Corporate Vice President and President, Aerospace Systems | | 23,905 |
| 47,810 |
| 0 |
| 2/15/2011 | 63.22 |
| 2/15/2018 | | 16,853 |
| 1,138,926 |
| 16,853 |
| 1,138,926 |
| | 0 |
| 0 |
| 0 |
| 2/15/2011 | 63.22 |
| 2/15/2018 | | 20,224 |
| 1,366,738 |
| 0 |
| 0 |
| | 97,416 |
| 48,710 |
| 0 |
| 2/16/2010 | 54.46 |
| 2/16/2017 | | 0 |
| 0 |
| 34,562 |
| 2,335,700 |
| | 56,985 |
| 0 |
| 0 |
| 2/27/2008 | 73.90 |
| 2/27/2015 | | 0 |
| 0 |
| 0 |
| 0 |
| | 16,406 |
| 0 |
| 0 |
| 9/19/2007 | 73.02 |
| 9/19/2017 | | 0 |
| 0 |
| 0 |
| 0 |
| | James F. Pitts | | 0 |
| 0 |
| 0 |
| 2/15/2012 | | | | 18,860 |
| 1,274,559 |
| 48,068 |
| 3,248,435 |
| Corporate Vice President and President, Electronic Systems | | 23,905 |
| 47,810 |
| 0 |
| 2/15/2011 | 63.22 |
| 2/15/2018 | | 16,853 |
| 1,138,926 |
| 16,853 |
| 1,138,926 |
| | | 97,416 |
| 48,710 |
| 0 |
| 2/16/2010 | 54.46 |
| 2/16/2017 | | 0 |
| 0 |
| 34,562 |
| 2,335,700 |
| | 137,869 |
| 0 |
| 0 |
| 2/17/2009 | 41.14 |
| 2/17/2016 | | 0 |
| 0 |
| 0 |
| 0 |
| | 73,282 |
| 0 |
| 0 |
| 2/27/2008 | 73.90 |
| 2/27/2015 | | 0 |
| 0 |
| 0 |
| 0 |
| | 39,375 |
| 0 |
| 0 |
| 2/28/2007 | 65.70 |
| 2/28/2017 | | 0 |
| 0 |
| 0 |
| 0 |
| | 43,750 |
| 0 |
| 0 |
| 2/15/2006 | 59.52 |
| 2/15/2016 | | 0 |
| 0 |
| 0 |
| 0 |
| | 13,125 |
| 0 |
| 0 |
| 10/1/2005 | 49.70 |
| 10/1/2015 | | 0 |
| 0 |
| 0 |
| 0 |
| | 19,687 |
| 0 |
| 0 |
| 6/14/2004 | 47.99 |
| 6/14/2014 | | 0 |
| 0 |
| 0 |
| 0 |
| | Linda A. Mills | | 0 |
| 0 |
| 0 |
| 12/18/2012 | | | | 7,298 |
| 493,199 |
| 0 |
| 0 |
| | Corporate Vice President and President, Information Systems | | 0 |
| 0 |
| 0 |
| 2/15/2012 | | | | 17,603 |
| 1,189,611 |
| 44,864 |
| 3,031,909 |
| | | 21,514 |
| 43,030 |
| 0 |
| 2/15/2011 | 63.22 |
| 2/15/2018 | | 15,168 |
| 1,025,053 |
| 15,168 |
| 1,025,053 |
| | | 89,468 |
| 44,736 |
| 0 |
| 2/16/2010 | 54.46 |
| 2/16/2017 | | 0 |
| 0 |
| 31,719 |
| 2,143,570 |
| | | 91,869 |
| 0 |
| 0 |
| 2/17/2009 | 41.14 |
| 2/17/2016 | | 0 |
| 0 |
| 0 |
| 0 |
| | | 48,836 |
| 0 |
| 0 |
| 2/27/2008 | 73.90 |
| 2/27/2015 | | 0 |
| 0 |
| 0 |
| 0 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Option Awards |
| Stock Awards | | Name |
| 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 ($) (3) | Equity Incentive Plan Awards: Number of Unearned Shares, Units, or Other Rights that Have Not Vested (#) (4) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights that Have Not Vested ($) (3) | | Wesley G. Bush | | 0 |
| 0 |
| 0 |
| 2/20/2013 | | | | 36,342 |
| 4,165,157 |
| 100,411 |
| 11,508,105 |
|
| 0 |
| 0 |
| 0 |
| 2/15/2012 | | | | 40,235 |
| 4,611,333 |
| 102,546 |
| 11,752,797 |
|
| 0 |
| 95,621 |
| 0 |
| 2/15/2011 | 63.22 |
| 2/15/2018 | | 67,415 |
| 7,726,433 |
| 67,415 |
| 7,726,433 |
| | James F. Palmer | | 0 |
| 0 |
| 0 |
| 9/17/2013 | | | | 20,253 |
| 2,321,196 |
| 0 |
| 0 |
| | | 0 |
| 0 |
| 0 |
| 2/20/2013 | | | | 15,899 |
| 1,822,184 |
| 43,930 |
| 5,034,817 |
|
| 0 |
| 0 |
| 0 |
| 2/15/2012 | | | | 17,603 |
| 2,017,480 |
| 44,864 |
| 5,141,863 |
|
| 0 |
| 23,905 |
| 0 |
| 2/15/2011 | 63.22 |
| 2/15/2018 | | 16,853 |
| 1,931,522 |
| 16,853 |
| 1,931,522 |
| | 0 |
| 141,533 |
| 0 |
| 2/16/2010 | 54.46 |
| 2/16/2017 | | 45,938 |
| 5,264,954 |
| 0 |
| 0 |
| | Gloria A. Flach |
| 0 |
| 0 |
| 0 |
| 2/20/2013 | | | | 15,899 |
| 1,822,184 |
| 43,930 |
| 5,034,817 |
|
| 0 |
| 0 |
| 0 |
| 7/19/2012 | | | | 15,356 |
| 1,759,951 |
| 0 |
| 0 |
| | 0 |
| 0 |
| 0 |
| 2/15/2012 | | | | 7,544 |
| 864,618 |
| 19,227 |
| 2,203,606 |
| | 22,948 |
| 11,476 |
| 0 |
| 2/15/2011 | 63.22 |
| 2/15/2018 | | 8,089 |
| 927,080 |
| 8,089 |
| 927,080 |
| | 59,664 |
| 0 |
| 0 |
| 2/16/2010 | 54.46 |
| 2/16/2017 | | 0 |
| 0 |
| 0 |
| 0 |
| | 7,148 |
| 0 |
| 0 |
| 2/17/2009 | 41.14 |
| 2/17/2016 | | 0 |
| 0 |
| 0 |
| 0 |
| | Linda A. Mills | | 0 |
| 0 |
| 0 |
| 2/20/2013 | | | | 15,899 |
| 1,822,184 |
| 43,930 |
| 5,034,817 |
| | | 0 |
| 0 |
| 0 |
| 12/18/2012 | | | | 7,298 |
| 836,424 |
| 0 |
| 0 |
|
| 0 |
| 0 |
| 0 |
| 2/15/2012 | | | | 17,603 |
| 2,017,480 |
| 44,864 |
| 5,141,863 |
|
| 43,028 |
| 21,516 |
| 0 |
| 2/15/2011 | 63.22 |
| 2/15/2018 | | 15,168 |
| 1,738,404 |
| 15,168 |
| 1,738,404 |
|
| 134,204 |
| 0 |
| 0 |
| 2/16/2010 | 54.46 |
| 2/16/2017 | | 0 |
| 0 |
| 0 |
| 0 |
| | | 46,869 |
| 0 |
| 0 |
| 2/17/2009 | 41.14 |
| 2/17/2016 | | 0 |
| 0 |
| 0 |
| 0 |
| | Thomas E. Vice |
| 0 |
| 0 |
| 0 |
| 2/20/2013 | | | | 15,899 |
| 1,822,184 |
| 43,930 |
| 5,034,817 |
|
| 0 |
| 0 |
| 0 |
| 7/19/2012 | | | | 7,678 |
| 879,976 |
| 0 |
| 0 |
| | | 0 |
| 0 |
| 0 |
| 2/15/2012 | | | | 12,070 |
| 1,383,343 |
| 30,764 |
| 3,525,862 |
|
| 0 |
| 14,344 |
| 0 |
| 2/15/2011 | 63.22 |
| 2/15/2018 | | 20,222 |
| 2,317,643 |
| 10,111 |
| 1,158,822 |
|
| | | (1) | Stock option vesting and terms - The Company did not grant stock options in 2012.2013. Options awarded through 2007 vested at a rate of 25% per year on the grant's 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 grant's anniversary date over the first three years of the seven-year option term. In 2010, Mr. Palmer received a retention award of 283,066 options that vestvested 50% three years from date of grant and will vest 50% four years from date of grant. The options have a seven-year term. |
| | | (2) | Restricted Stock Rights - Outstanding RSRs vest as follows: Mr. Palmer's outstanding retention grant of 45,938 shares will vest on February 16, 2014. RSRs granted in 2011 will fully vest four years from date of grantgrant. RSRs granted in 2012 and 2013 will fully vest three years from date of grant. Mr. Palmer's outstanding retention grants of 45,938 and 20,253 shares vest on February 15, 2015.16, 2014 and March 1, 2015, respectively. |
| | | (3) | Market Value or Payout Value - The value listed is based on the closing price of the Company's stock of $67.58$114.61 on December 31, 2012,2013, the last trading day of the year. |
| | | (4) | The 2013 RPSR award for each NEO vests based on performance for the three-year performance period ending on December 31, 2015. The 2012 RPSR award vests based on performance for the three-year performance period ending on December 31, 2014. The 2011 RPSR award vested based on performance for the three-year performance period ended on December 31, 2013. In each case, settlement of the award is subject to certification by the Compensation Committee. |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENT I 45
| | COMPENSATION DISCUSSION AND ANALYSIS | OUTSTANDING EQUITY AWARDS TABLE |
| | (4) | Restricted Performance Stock Rights - The 2012 RPSR award for each NEO vests based on performance for the three-year performance period ending on December 31, 2014. The 2011 RPSR award vests based on performance for the three-year performance period ending on December 31, 2013. The 2010 RPSR award vested based on performance for the three-year performance period ended on December 31, 2012. In each case, settlement of the award is subject to certification by the Compensation Committee. |
46INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENT
| | COMPENSATION DISCUSSION AND ANALYSIS | OPTION EXERCISESAND STOCK VESTED TABLE
|
20122013 Option Exercises and Stock Vested
| | | | | | | | | | | | | | | | | Option Awards (1) | | Stock Awards (1) | | Name & Principal Position | | Number of Shares Acquired on Exercise (#) | | Value Realized on Exercise ($) | | Number of Shares Acquired on Vesting (#) | | Value Realized on Vesting ($) | | Wesley G. Bush | | 910,181 |
| | 14,802,707 |
| | 100,188 |
| | 6,032,368 |
| | Chairman, Chief Executive Officer and President | | | | | | | | | | James F. Palmer | | 273,566 |
| | 4,697,182 |
| | 49,000 |
| | 2,950,290 |
| Corporate Vice President and Chief Financial Officer | | | | | | | | | | Gary W. Ervin | | 119,119 |
| | 2,394,210 |
| | 38,324 |
| | 2,307,536 |
| Corporate Vice President and President, Aerospace Systems | | | | | | | | | | James F. Pitts | | 16,406 |
| | 126,873 |
| | 38,324 |
| | 2,307,536 |
| Corporate Vice President and President, Electronic Systems | | | | | | | | | | Linda A. Mills | | 46,000 |
| | 783,260 |
| | 38,324 |
| | 2,307,536 |
| Corporate Vice President and President, Information Systems | | | | | | | | |
| | | | | | | | | | | | | | | | | Option Awards (1) | | Stock Awards (1) | | Name | | Number of Shares Acquired on Exercise (#) | | Value Realized on Exercise ($) | | Number of Shares Acquired on Vesting (#) | | Value Realized on Vesting ($) | | Wesley G. Bush | | 732,082 |
| | 17,859,770 |
| | 191,890 |
| | 12,672,389 |
| | James F. Palmer | | 371,327 |
| | 11,131,563 |
| | 55,299 |
| | 3,651,959 |
| | Gloria A. Flach | | 7,437 |
| | 377,959 |
| | 22,574 |
| | 1,490,813 |
| | Linda A. Mills | | 93,836 |
| | 3,252,571 |
| | 50,750 |
| | 3,351,556 |
| | Thomas E. Vice | | 42,568 |
| | 2,228,019 |
| | 38,321 |
| | 2,530,706 |
|
| | | (1) | Number of shares and amounts reflected in the table are reported on an aggregate basis and do not reflect shares that were sold or withheld to pay withholding taxes and/or the option exercise price. |
46INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 20132014 PROXY STATEMENTI 47
| | COMPENSATION DISCUSSION AND ANALYSISTABLES | PENSION BENEFITS
|
The following table provides information about the pension plans in which the NEOs participate, including the present value of each NEO's accumulated benefits as of December 31, 2012.2013. Our policy is thatgenerally limits an executive's total benefit under these plans shouldto be limited to no more than 60% of final average pay. Mr. Bush has voluntarily elected to limit his OSERP benefit to no more than 50% of final average pay. | | | | | | | | | | | | | | | | Name & Principal Position | | Plan Name | | Number of Years Credited Service (#) | | | | Present Value of Accumulated Benefit (1) ($) | | Payments During Last Fiscal Year ($) | | Wesley G. Bush | | Pension Plan (3) | | 10.00 |
| | | | 482,285 |
| | | | Chairman, Chief Executive Officer and | | S&MS Pension Plan (2) | | 15.67 |
| | | | 526,092 |
| | | | President | | ERISA 2 (3) | | 10.00 |
| | | | 7,642,245 |
| | | | | | SRIP (2) | | 15.67 |
| | | | 7,666,292 |
| | | | | | OSERP (4)(5) | | 25.67 |
| | | | 6,015,020 |
| | | | James F. Palmer | | Pension Plan (3) | | 5.83 |
| | | | 191,848 |
| | | | Corporate Vice President and | | ERISA 2 (3) | | 5.83 |
| | | | 1,242,820 |
| | | | Chief Financial Officer | | CPC SERP (5) | | 5.83 |
| | | | 2,873,089 |
| | | | | | SRRP (5) | | N/A |
| | | | 1,717,994 |
| | 103,584 |
| | Gary W. Ervin | | Pension Plan (3) | | 11.33 |
| | | | 375,983 |
| | | | Corporate Vice President and | | ERISA 2 (3) | | 11.33 |
| | | | 2,235,645 |
| | | | President, Aerospace Systems | | CPC SERP (5) | | 5.33 |
| | | | 1,687,917 |
| | | | James F. Pitts | | Pension Plan (3) | | 39.54 |
| | | | 1,342,778 |
| | | | Corporate Vice President and | | ERISA 2 (3) | | 9.50 |
| | | | 2,405,457 |
| | | | President, Electronic Systems | | CPC SERP (5) | | 7.25 |
| | | | 2,074,188 |
| | | | | | ESEPP (5) | | 39.54 |
| | | | 8,931,122 |
| | | | Linda A. Mills | | S&MS Pension Plan (3) | | 33.58 |
| | | | 1,573,481 |
| | | | Corporate Vice President and | | SRIP (3) | | 33.58 |
| | | | 7,963,858 |
| | | | President, Information Systems | | CPC SERP (5) | | 4.92 |
| | | | 2,206,839 |
| | |
| | | | | | | | | | | | | | | | Name | | Plan Name | | Number of Years Credited Service (#) | | | | Present Value of Accumulated Benefit (1) ($) | | Payments During Last Fiscal Year ($) | | Wesley G. Bush | | Pension Plan | | 11.00 |
| | | | 496,780 |
| | | | | S&MS Pension Plan | | 15.67 |
| | | | 489,320 |
| | | | | ERISA 2 | | 11.00 |
| | | | 9,113,444 |
| | | | | SRIP | | 15.67 |
| | | | 8,385,558 |
| | | | | OSERP | | 26.67 |
| | | | 8,219,793 |
| | | | James F. Palmer | | Pension Plan | | 6.83 |
| | | | 211,995 |
| | | | | ERISA 2 | | 6.83 |
| | | | 1,415,341 |
| | | | | CPC SERP | | 6.83 |
| | | | 3,955,639 |
| | | | | SRRP | | N/A |
| | | | 1,549,515 |
| | 103,584 |
| | Gloria A. Flach | | Pension Plan | | 32.39 |
| | | | 840,740 |
| | | | | ERISA 2 | | 10.50 |
| | | | 786,283 |
| | | | | ESEPP | | 32.39 |
| | | | 3,329,013 |
| | | | | OSERP | | 32.42 |
| | | | 6,902,175 |
| | | | Linda A. Mills | | S&MS Pension Plan | | 34.58 |
| | | | 1,489,554 |
| | | | | SRIP | | 34.58 |
| | | | 9,192,961 |
| | | | | CPC SERP | | 5.92 |
| | | | 3,024,927 |
| | | | Thomas E. Vice | | Pension Plan | | 27.17 |
| | | | 1,330,683 |
| | | | | ERISA 2 | | 27.17 |
| | | | 6,603,798 |
| | | | | OSERP | | 27.00 |
| | | | 148,883 |
| | |
| | | (1) | Amounts are calculated using the following assumptions: |
The NEO retires on the earliest date he/she could receive an unreduced benefit under each plan; The form of payment is a single life annuity; and The discount rate is 4.96% for the Pension Plan, 5.10% for the S&MS Pension Plan and 4.99% for all others; the mortality table is the RP-2000 projected 24 years without collar adjustment (the same assumptions used for the Company's financial statements).
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENTI 47
| | ▪ | The NEO retired on the earliest date he/she could receive an unreduced benefit under each plan;COMPENSATION TABLES | PENSION BENEFITS
|
| | ▪ | The form of payment is single life annuity; and |
| | ▪ | The discount rate is 4.10% for the Pension Plan, 4.21% for the S&MS Pension PlanPlans and 4.12% for all others; the mortality table is the RP-2000 projected 18 years without collar adjustment (the same assumptions used for the Company's financial statements).Descriptions |
| | (2) | Service is frozen and all pay updates cease December 31, 2014. |
| | (3) | Final average pay updates cease December 31, 2014. |
| | (4) | Mr. Bush relinquished his CPC SERP benefit and instead participates in the OSERP. |
| | (5) | Plan benefit is frozen on or before December 31, 2014 (depending on the plan). |
List of Pension Plans and Descriptions
The pension plans in which the NEOs participate are listed below in alphabetical order. Most of the plans were closed to new hires in 2008. In addition, effective mid-2008. Effective on or beforeas of December 31, 2014, the nonqualified supplementalCPC SERP, OSERP and ESEPP will be frozen. The NEOs will instead participate in a deferred compensation plan, called the Officers Retirement Account Contribution Plan, along with other Company officers.
The pension plans have been frozen or pay updates cease, as indicated below:in which NEOs participate are listed below in alphabetical order. ▪"CPC SERP"SERP is the CPC Supplemental Executive Retirement Program. This plan provides a supplemental pension benefit for certain CPC members. Plan benefits are frozen as of December 31, 2014.
▪"ERISA 2"2 is the ERISA Supplemental Program 2. This plan makes participants whole for benefits they lose under the Pension Plan due to certain Internal Revenue Code limits. Final average pay updates cease December 31, 2014.
48INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENT
| | COMPENSATION DISCUSSION AND ANALYSIS | PENSION BENEFITS
|
▪"ESEPP"ESEPP is the Northrop Grumman Electronic Systems Executive Pension Plan. This plan provides a supplemental pension benefit for certain ES Sector executives. Plan benefits are frozen as of December 31, 2014.
▪OSERP "OSERP"is the Officers Supplemental Executive Retirement Program. This plan provides a supplemental pension benefit for certain officers of the Company including some of the NEOs.officers.
Pension Plan benefits are frozen as of December 31, 2014. ▪"Pension Plan" is the Northrop Grumman Pension Plan. This is a tax qualified pension plan covering a broad base of Company employees. Final average pay updates cease as of December 31, 2014.
▪"S&MS Pension Plan"Plan is the Northrop Grumman Space & Mission Systems Salaried Pension Plan (former TRW pension plan). This is a tax qualified pension plan covering a broad base of Company employees. Final average pay updates cease as of December 31, 2014.
▪"SRIP"SRIP is the Northrop Grumman Supplementary Retirement Income Plan (former TRW plan). This plan makes participants whole for benefits they lose under the S&MS Pension Plan due to certain Internal Revenue Code limits. Final average pay updates cease as of December 31, 2014.
▪"SRRP"SRRP is the Supplemental Retirement Replacement Plan. This frozen plan replaced benefits Mr. Palmer forfeited as a result of his commencing employment with the Company.
Pension Plan and S&MS Pension Plan (Tax Qualified Plans)
The
| | | Pension Plan and S&MS Pension Plan (Tax Qualified Plans) |
Due to acquisitions, the S&MS Pension Plan were each amended priorCompany acquired various pension plans with different types of pension formulas. These are described in detail in the Heritage Formula table that follows. Prior to 2005, to change from a traditional pension plan formula ("the Company transitioned the various Heritage Formula")Formulas in these plans to a cash balance formula ("single formula: a Cash Balance Formula")formula. The pension under the Cash Balance formula is a percentage of pay credited to a hypothetical account which grows with interest. At retirement, the Cash Balance Account is converted to a monthly pension benefit (further information is included in the Cash Balance Formula section below). Except as provided below, the final benefit from each plan is the sum of the benefits under the two formulas: the Heritage Formula benefit plus the Cash Balance Formula benefit. The following explains the formulas applicable to each NEO: ▪Mr. Bush and Mr. Ervin eachVice receive a benefit under a Heritage Formula and a Cash Balance Formula in the Northrop Grumman Retirement Plan, a subplan of the Pension Plan ("NGR Subplan")(NGR Subplan).
▪Mr. Bush also receives a frozen benefit under a Heritage Formula in the S&MS Pension Plan due to his TRW-related service. He ceased to be eligible for future service growth under this plan and SRIP when he began participating in the NGR Subplan.
▪Due to his date of hire, Mr. Palmer does not receive a benefit under a Heritage Formula; he only receives a benefit under a Cash Balance Formula in the Pension Plan.
▪Mr. PittsMs. Flach receives a benefit under a Heritage Formula and a Cash Balance formula in the Northrop Grumman Electronic Systems Pension Plan, a subplan of the Pension Plan ("ES Subplan")(ES Subplan).
▪Ms. Mills receives a benefit under a Heritage Formula and a Cash Balance formula in the S&MS Pension Plan.
48INOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
| | COMPENSATION TABLES | PENSION BENEFITS
|
The following table summarizes the key features of the Heritage Formulas applicable to the eligible NEOs. | | | | | | | | | Feature | | NGR Subplan | | ES Subplan | | S&MS Pension Plan | | | | | | Benefit Formula | | Final Average Pay x 1.6667% times Pre-July 1, 2003 service | | Eligible Pay since 1995 x 2% plus the prior Westinghouse Pension Plan benefit | | (Final Average Pay x 1.5% minus Covered Compensation x 0.4%) times Pre- January 1, 2005 service | | Final Average Pay | | Average of highest 3 years of Eligible Pay | | Not applicable | | Average of the highest 5 consecutive years of Eligible PayPay; Covered Compensation is specified by the IRS | | Eligible Pay (limited by Internal Revenue Code section 401(a)(17)) | | Salary plus bonus | | Salary plus bonus (50% of bonus through 2001) | | Salary plus bonus | | Normal Retirement | | Age 65 | | Age 65 | | Age 65 | | Early Retirement | | Age 55 with 10 years of service | | Age 58 with 30 years of service or age 60 with 10 years of service | | Age 55 with 10 years of service | | Early Retirement Reduction (for retirements occurring between Early Retirement and Normal Retirement) | | Benefits are reduced for commencement prior to the earlier of age 65 and 85 points (age + service) | | Benefits are reduced for commencement prior to age 60 | | Benefits are reduced for commencement prior to age 60 |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2013 PROXY STATEMENTI 49
| | COMPENSATION DISCUSSION AND ANALYSIS | PENSION BENEFITS
|
Cash Balance Formula |
