NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
I
37
|
|
COMPENSATION DISCUSSION AND ANALYSIS | K
EY
C
OMPONENTS
OF OUR
P
ROGRAMS
|
Recently Completed RPSR Performance Period (2011 – 2013)
In February 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 2014, the Compensation Committee reviewed performance for the January 1, 2011 to December 31, 2013 RPSR performance period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentile Required to Score
|
|
|
Metric/Goal
|
|
Weighting
|
|
0%
|
|
100%
|
|
200%
|
|
2013 Actual
Performance *
|
Relative TSR - Performance Peer Group
|
|
50%
|
|
25th
|
|
50th
|
|
80th
|
|
56th
|
Relative TSR - S&P Industrials
|
|
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.
|
Decisions for 2013
Based on 2011 - 2013 TSR performance, we ranked fifth against the Performance Peer Group and were in the 56th percentile. We were in the 85th percentile of the S&P Industrials. The combined weighted score generated an overall performance score of 159%.
In early 2014, the NEOs received payouts in stock with respect to the performance awards that were granted in February 2011 for the three-year performance period ending December 31, 2013. These awards were paid at 159% of the target number of shares initially awarded.
This section describes other benefits the NEOs receive. These benefits are not 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 our 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.
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 (except for small variations due to contractual restrictions under the plans). 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.
Retiree Medical Arrangement
The Special Officer Retiree Medical Plan (SORMP) was closed to new participants in 2007. NEOs who are vested participants in the SORMP are entitled to retiree medical benefits pursuant to the terms of the SORMP. 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 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.
38
I
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
|
|
COMPENSATION DISCUSSION AND ANALYSIS | K
EY
C
OMPONENTS
OF OUR
P
ROGRAMS
|
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 for executives and are useful in attracting, retaining and motivating talented executives. Perquisites provided to the NEOs in 2013 are detailed in the Summary Compensation Table.
Security Arrangements
Given the nature of our business, we maintain a comprehensive security program. As a component of that program, we provide 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 consider both security risks faced by those in our industry in general and security risks specific to our Company and its 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 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 Benefits
We maintain a severance plan that is available to our NEOs who qualify and are approved to receive such benefits. The purpose of the severance plan is to help bridge the gap in an executive's income and health coverage during a period of unemployment following termination.
We do not maintain any 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.
Upon a "qualifying termination" (defined below) the Company will 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 release, he or she will receive: (i) a lump sum severance benefit equal to one and one-half times annual base salary and target bonus, (ii) a pro-rated performance bonus, (iii) continued medical and dental coverage for the severance period, (iv) income tax preparation/financial planning fees for the year of termination and the following year and (v) outplacement expenses up to 15% of salary, 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 year of termination and $15,000 for the year following termination.
A "qualifying termination" means one of the following:
|
|
•
|
involuntary termination, other than for cause or mandatory retirement; or
|
|
|
•
|
election to terminate in lieu of accepting a downgrade to a non-officer position (i.e., good reason).
|
Mr. Bush was elected to the position 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 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 STATEMENT
I
39
|
|
COMPENSATION DISCUSSION AND ANALYSIS | K
EY
C
OMPONENTS
OF OUR
P
ROGRAMS
|
Change in Control Benefits
We do not maintain separate change in control programs or agreements. The only change in control benefits available to the NEOs are those described in the terms and conditions of the 2001 Long-Term Incentive Stock Plan (2001 Plan) and the 2011 Long-Term Incentive Stock Plan (2011 Plan).
Stock Ownership Guidelines
We maintain stock 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 guidelines 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 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. As of December 31, 2013, the CEO and other NEOs were in compliance with the ownership guidelines. The Compensation Committee continues to monitor compliance and will conduct a full review again in 2014.
Stock Holding Requirements
We have a holding period requirement for long-term incentive grants, 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 philosophy. The Compensation Committee reviews and approves long-term incentive grants during its scheduled 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.
40
I
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
|
|
COMPENSATION DISCUSSION AND ANALYSIS | K
EY
C
OMPONENTS
OF OUR
P
ROGRAMS
|
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 are not considered performance-based under Section 162(m) and, as such, may not be deductible.
Since the CEO's salary in 2013 was above the $1,000,000 threshold, a portion of his salary and his perquisites are not deductible by the Company.
Say-on-Pay
Our shareholders are asked to approve on an annual, advisory basis, the compensation paid to our NEOs. We regularly engage with our shareholders to understand their concerns regarding executive compensation. Our shareholders expressed a preference for full-value shares as they are less dilutive and provide stronger alignment with shareholder interests. In 2012, as a result of feedback from our shareholders, the Compensation Committee eliminated the use of stock options and approved a mix of LTI awards to NEOs composed of 70% RPSRs and 30% RSRs.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
I
41
|
|
COMPENSATION TABLES | S
UMMARY
C
OMPENSATION
T
ABLE
|
2013 Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name & Principal Position
|
|
Year
|
|
Salary (1)
($)
|
|
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
|
|
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 the periods presented. The Company did not grant stock options in 2013. For assumptions used in calculating the grant date fair value, see the discussion in Note 14 of the Company's 2013 Form 10-K, adjusted to exclude forfeitures.
|
|
|
(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.
|
|
|
(6)
|
All Other Compensation amounts include, as applicable, (a) the value of perquisites and personal benefits and (b) the amount of Company contributions to defined contribution 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
42
I
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
|
|
COMPENSATION TABLES | S
UMMARY
C
OMPENSATION
T
ABLE
|
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 $25,000 or 10% of total perquisites and personal benefits for any NEO in 2013, except for the following: (i) for Mr. Bush, costs attributable to security protection ($
1,252,874
), which includes unbilled prior year costs paid in 2013 and personal travel on Company aircraft consistent with the Company's security program ($
249,178
), (ii) for Mr. Palmer, costs attributable to personal travel on Company aircraft ($
27,698
), and (iii) for Mr. Vice, costs attributable to 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 imputed to Mr. Bush under IRS regulations for personal travel on the corporate aircraft by him and his family members.
We determine the incremental cost 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.
Contributions to Plans
- In 2013, we made the following contributions to Northrop Grumman defined contribution plans (the Northrop Grumman Savings Plan and Savings Excess Plan): Mr. Bush $
224,701
, Mr. Palmer $
96,374
, Ms. Flach $
62,705
, Ms. Mills $
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.
|
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
I
43
|
|
COMPENSATION TABLES | G
RANTS OF
P
LAN-
B
ASED
A
WARDS
T
ABLE
|
2013 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
($/Sh)
|
Grant
Date Fair
Value of
Stock and
Option
Awards
(2)(5)
|
Name
|
Grant Type
|
Grant Date
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
|
Threshold
(#)
|
Target
(#)
|
Maximum
(#)
|
Wesley G. Bush
|
Incentive Plan
|
|
0
|
|
2,250,000
|
|
4,500,000
|
|
|
|
|
|
|
|
|
|
RPSR
|
2/20/2013
|
|
|
|
|
0
|
|
100,411
|
|
150,617
|
|
|
|
|
5,600,000
|
|
RSR
|
2/20/2013
|
|
|
|
|
|
|
|
36,342
|
|
|
|
2,400,026
|
|
James F. Palmer
|
Incentive Plan
|
|
0
|
|
850,000
|
|
1,700,000
|
|
|
|
|
|
|
|
|
|
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
|
|
Gloria A. Flach
|
Incentive Plan
|
|
0
|
|
750,000
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
RPSR
|
2/20/2013
|
|
|
|
|
0
|
|
43,930
|
|
65,895
|
|
|
|
|
2,450,010
|
|
RSR
|
2/20/2013
|
|
|
|
|
|
|
|
15,899
|
|
|
|
1,049,970
|
|
Linda A. Mills
|
Incentive Plan
|
|
0
|
|
775,000
|
|
1,550,000
|
|
|
|
|
|
|
|
|
|
RPSR
|
2/20/2013
|
|
|
|
|
0
|
|
43,930
|
|
65,895
|
|
|
|
|
2,450,010
|
|
RSR
|
2/20/2013
|
|
|
|
|
|
|
|
15,899
|
|
|
|
1,049,970
|
|
Thomas E. Vice
|
Incentive Plan
|
|
0
|
|
750,000
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
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."
|
|
|
(2)
|
The Company did not grant stock options in 2013.
|
|
|
(3)
|
These amounts relate to RPSRs granted in 2013 under the 2011 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, 2013 and ending December 31, 2015. The payout will occur in early 2016 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.
|
|
|
(4)
|
These amounts relate to RSRs granted in 2013 under the 2011 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 the 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 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 2013 Form 10-K, adjusted to exclude forfeitures.
|
44
I
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
|
|
COMPENSATION TABLES | O
UTSTANDING
E
QUITY
A
WARDS
T
ABLE
|
Outstanding Equity Awards at 2013 Fiscal Year End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
The Company did not grant stock options in 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 vested 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)
|
Outstanding RSRs vest as follows: RSRs granted in 2011 will fully vest four years from date of grant. 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 16, 2014 and March 1, 2015, respectively.
|
|
|
(3)
|
The value listed is based on the closing price of the Company's stock of $114.61 on December 31, 2013, the last trading day of the year.
|
|
|
(4)
|
The 2013 RPSR award for each NEO vests based on performance for the three-year performance period ending on December 31, 2015. The 2012 RPSR award vests based on performance for the three-year performance period ending on December 31, 2014. The 2011 RPSR award vested based on performance for the three-year performance period ended on December 31, 2013. In each case, settlement of the award is subject to certification by the Compensation Committee.
|
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
I
45
|
|
COMPENSATION DISCUSSION AND ANALYSIS | O
PTION
E
XERCISES AND
S
TOCK
V
ESTED
T
ABLE
|
2013 Option Exercises and Stock Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards (1)
|
|
Stock Awards (1)
|
Name
|
|
Number of
Shares Acquired
on Exercise
(#)
|
|
Value
Realized on
Exercise
($)
|
|
Number of
Shares Acquired
on Vesting
(#)
|
|
Value
Realized on
Vesting
($)
|
Wesley G. Bush
|
|
732,082
|
|
|
17,859,770
|
|
|
191,890
|
|
|
12,672,389
|
|
James F. Palmer
|
|
371,327
|
|
|
11,131,563
|
|
|
55,299
|
|
|
3,651,959
|
|
Gloria A. Flach
|
|
7,437
|
|
|
377,959
|
|
|
22,574
|
|
|
1,490,813
|
|
Linda A. Mills
|
|
93,836
|
|
|
3,252,571
|
|
|
50,750
|
|
|
3,351,556
|
|
Thomas E. Vice
|
|
42,568
|
|
|
2,228,019
|
|
|
38,321
|
|
|
2,530,706
|
|
|
|
(1)
|
Number of shares and amounts reflected in the table are reported on an aggregate basis and do not reflect shares that were sold or withheld to pay withholding taxes and/or the option exercise price.
|
46
I
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
|
|
COMPENSATION TABLES | P
ENSION
B
ENEFITS
|
The following table provides information about the pension plans in which the NEOs participate, including the present value of each NEO's accumulated benefits as of December 31, 2013. Our policy generally limits an executive's total benefit under these plans to be no more than 60% of final average pay. Mr. Bush has voluntarily elected to limit his OSERP benefit to no more than 50% of final average pay.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Plan Name
|
|
Number of
Years
Credited
Service (#)
|
|
|
|
Present Value of
Accumulated
Benefit (1)
($)
|
|
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 STATEMENT
I
47
|
|
COMPENSATION TABLES | P
ENSION
B
ENEFITS
|
|
|
Pension Plans and Descriptions
|
Most of the plans were closed to new hires in 2008. In addition, effective as of December 31, 2014, the CPC 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 in which NEOs participate are listed below in alphabetical order.
|
|
•
|
CPC SERP
is the CPC Supplemental Executive Retirement Program. This plan provides a supplemental pension benefit for certain CPC members.
|
|
|
•
|
ERISA 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.
|
|
|
•
|
ESEPP
is the Northrop Grumman Electronic Systems Executive Pension Plan. This plan provides a supplemental pension benefit for certain ES Sector executives.
|
|
|
•
|
OSERP
is the Officers Supplemental Executive Retirement Program. This plan provides a supplemental pension benefit for certain Company officers.
|
|
|
•
|
Pension Plan
is the Northrop Grumman Pension Plan. This is a tax qualified pension plan covering a broad base of Company employees.
|
|
|
•
|
S&MS Pension Plan
is the Northrop Grumman Space & Mission Systems Salaried Pension Plan (former TRW plan). This is a tax qualified pension plan covering a broad base of Company employees.
|
|
|
•
|
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.
|
|
|
•
|
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)
|
Due to acquisitions, the Company 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, the Company transitioned the various Heritage Formulas in these plans to a single formula: a Cash Balance 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 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. Vice 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).
|
|
|
•
|
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.
|
|
|
•
|
Ms. 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).
|
|
|
•
|
Ms. Mills receives a benefit under a Heritage Formula and a Cash Balance formula in the S&MS Pension Plan.
|
48
I
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
|
|
COMPENSATION TABLES | P
ENSION
B
ENEFITS
|
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 Pay; 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
|
The Cash Balance Formula is a hypothetical account balance consisting of pay credits plus interest. It has the following features:
|
|
•
|
Pay credits are a percentage of pay that vary based on an employee's "points" (age plus service). The range of percentages applicable to the NEOs on December 31, 2013 was 6.5% – 9%.
|
|
|
•
|
Interest is credited at the 30-year U.S. Treasury bond rate. The December 31, 2013 interest credit rate was 3.76%.
|
|
|
•
|
Eligible pay is salary plus bonus, as limited by Internal Revenue Code section 401(a)(17).
|
|
|
•
|
Eligibility for early retirement occurs at age 55 with 10 years of service. Benefits may be reduced if commenced prior to Normal Retirement Age (65).
|
|
|
ERISA 2, SRIP and SRRP (Nonqualified Restoration Plans)
|
ERISA 2 and SRIP are nonqualified plans that restore benefits provided for under the Pension Plan and S&MS Pension Plan, respectively, but for the limits on eligible pay imposed by Internal Revenue Code section 401(a)(17) and the overall benefit limitation of Internal Revenue Code section 415. Benefits and features in these restoration plans otherwise are generally the same as described above for the underlying tax qualified plan.
SRRP entitles Mr. Palmer to an annuity equal to the amount that would have been paid to him under his former employer's supplemental retirement plan but for his employment with the Company.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
I
49
|
|
COMPENSATION TABLES | P
ENSION
B
ENEFITS
|
|
|
CPC SERP, OSERP and ESEPP (Nonqualified Supplemental Executive Retirement Plans)
|
These plans provide pension benefits that supplement the tax qualified pension plans. They were closed to new hires several years ago. In addition, the service and pay-related features of these plans will be frozen as of December 31, 2014.
The following chart highlights the key features of these plans applicable to eligible NEOs.
|
|
|
|
|
|
|
|
Feature
|
|
CPC SERP
|
|
OSERP
|
|
ESEPP
|
Benefit Formula
|
|
Greater of CPC Formula and OSERP Formula
CPC Formula is:
Final Average Pay times 3.3334% for each year that the NEO has served on the CPC up to 10 years, 1.5% for each subsequent year up to 20 years and 1% for each additional year over 20
|
|
Final Average Pay times 2% for each year of service up to 10 years, 1.5% for each subsequent year up to 20 years, and 1% for each additional year over 20 and less than 45
|
|
Final Average Pay times 1.47% for each year that the NEO made maximum contributions to the ES Subplan
|
Final Average Pay
|
|
Average of highest
3 years of Eligible Pay
|
|
Average of highest
3 years of Eligible Pay
|
|
Average of highest
5 years of Eligible Pay
|
Eligible Pay
|
|
Salary and bonus (including amounts above Internal Revenue Code limits and amounts deferred)
|
|
Salary and bonus (including amounts above Internal Revenue Code limits
and amounts deferred)
|
|
Salary and bonus averaged separately (including amounts above Internal Revenue Code limits and amounts deferred)
|
Normal Retirement
|
|
Age 65
|
|
Age 65
|
|
Age 65
|
Early Retirement
|
|
Age 55 with 10 years of service
|
|
Age 55 with 10 years of service
|
|
Age 58 with 30 years of service or
Age 60 with 10 years of service
|
Early Retirement
Reduction
|
|
Benefits are reduced for commencement prior to the earlier of age 65 or 85 points (age + service)
|
|
Benefits are reduced for commencement prior to the earlier
of age 65 or 85 points (age + service)
|
|
Benefits are reduced for
commencement prior to age 60
|
Reductions From Other Plans
|
|
Reduced by any other Company pension benefits accrued during period of CPC service
|
|
Reduced by any other Company
pension benefits
|
|
Reduced by ES Subplan and ERISA 2 benefits
|
|
|
Information on Executives Eligible to Retire
|
The following NEOs were eligible to retire as of December 31, 2013 under the below specified plans:
|
|
•
|
If Mr. Palmer had retired on December 31, 2013, he would have been eligible to receive estimated annual CPC SERP and ERISA 2 benefits totaling $437,016.
|
|
|
•
|
If Ms. Flach had retired on December 31, 2013, she would have been eligible to receive estimated annual Pension Plan (ES Subplan) benefits totaling $31,322.
|
|
|
•
|
If Ms. Mills had retired on December 31, 2013, she would have been eligible to receive estimated annual S&MS Pension Plan, SRIP and CPC SERP benefits totaling $1,073,590.
|
50
I
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
|
|
COMPENSATION DISCUSSION AND ANALYSIS | N
ONQUALIFIED
D
EFERRED
C
OMPENSATION
|
2013 Nonqualified Deferred Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Plan Name
|
|
Executive
Contributions
in Last FY (1)
($)
|
|
Registrant
Contributions
in Last FY (2)
($)
|
|
Aggregate
Earnings
in Last FY (3)
($)
|
|
Aggregate
Withdrawals/
Distributions
($)
|
|
Aggregate
Balance at
Last FYE (4)
($)
|
Wesley G. Bush
|
|
Deferred Compensation
|
|
0
|
|
|
0
|
|
|
524,767
|
|
|
0
|
|
|
2,290,190
|
|
|
Savings Excess
|
|
429,002
|
|
|
214,501
|
|
|
906,566
|
|
|
0
|
|
|
5,684,568
|
|
James F. Palmer
|
|
Deferred Compensation
|
|
0
|
|
|
0
|
|
|
188,640
|
|
|
0
|
|
|
850,811
|
|
|
Savings Excess
|
|
215,502
|
|
|
86,548
|
|
|
803,563
|
|
|
0
|
|
|
3,476,323
|
|
Gloria A. Flach
|
|
Deferred Compensation
|
|
0
|
|
|
0
|
|
|
116,773
|
|
|
0
|
|
|
879,100
|
|
|
Savings Excess
|
|
262,692
|
|
|
53,288
|
|
|
28,173
|
|
|
0
|
|
|
567,791
|
|
Linda A. Mills
|
|
Deferred Compensation
|
|
0
|
|
|
0
|
|
|
220,504
|
|
|
0
|
|
|
1,365,006
|
|
|
Savings Excess
|
|
388,002
|
|
|
79,945
|
|
|
537,234
|
|
|
0
|
|
|
3,606,154
|
|
Thomas E. Vice
|
|
Deferred Compensation
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Savings Excess
|
|
524,058
|
|
|
64,200
|
|
|
301,630
|
|
|
0
|
|
|
1,815,552
|
|
|
|
(1)
|
NEO contributions in this column are also included in the 2013 Summary Compensation Table, under the columns entitled "Salary" and "Non-Equity Incentive Plan Compensation."
|
|
|
(2)
|
Company contributions in this column are included in the 2013 Summary Compensation Table, under the column entitled "All Other Compensation."
|
|
|
(3)
|
Aggregate earnings in the last fiscal year are not included in the 2013 Summary Compensation Table, because they are not above market or preferential.
|
|
|
(4)
|
NEO and Company contributions in this column may include balances for merged plans. Employee contributions by Messrs. Bush and Palmer and Ms. Mills for the years ended December 31, 2013, 2012 and 2011, collectively, previously reported as compensation in the Summary Compensation tables, were as follows:
|
|
|
•
|
Mr. Bush's Savings Excess Plan (SEP) account includes $1,192,312 in employee contributions for those years.
|
|
|
•
|
Mr. Palmer's SEP account includes $720,562 in employee contributions for those years.
|
|
|
•
|
Ms. Mills' SEP account includes $1,401,840 in employee contributions for those years.
|
Employee contributions by Ms. Flach and Mr. Vice for the year ended December 31, 2013 are presented in the table above. Because Ms. Flach and Mr. Vice were not NEOs for the years ended December 31, 2012 and 2011, employee contribution data for those years is not presented.
|
|
Deferred Compensation Plans and Descriptions
|
The deferred compensation plans in which the NEOs participate are listed below in alphabetical order:
|
|
•
|
Deferred Compensation
is the Northrop Grumman Deferred Compensation Plan. This plan was closed to future contributions at the end of 2010. Before 2011, eligible executives were allowed to defer a portion of their salary and bonus. No Company contributions were made to the plan.
|
|
|
•
|
Savings Excess
or
SEP
is the Northrop Grumman Savings Excess Plan. This plan allows the NEOs and other eligible employees to defer up to 75% of their salary and bonus beyond the compensation limits of the tax qualified plans and receive a Company matching contribution of up to 4%. The lifetime maximum amount of combined NEO and Company contributions under this plan (excluding contributions made in other plans which were subsequently merged into this plan) is limited to $5,000,000 per NEO, subject to certain exclusions such as earnings.
|
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
I
51
|
|
COMPENSATION DISCUSSION AND ANALYSIS | S
EVERANCE
P
ROGRAM
|
The terms of equity awards granted to the NEOs under the 2001 Plan and the 2011 Plan provide for accelerated vesting if an NEO's employment terminates for certain reasons.
For stock options, accelerated vesting of the next installment of each award results from a termination due to death, disability or early retirement (after age 55 with 10 years of service). Stock options fully vest for normal retirement at age 65 (with 10 years of service). Vesting treatment under mandatory retirement at age 65 depends on years of service and when the grant was made. An extended exercise period is also provided for options under these circumstances.
For RPSRs, accelerated vesting of a pro-rated portion of each award results from a termination due to death, disability, or retirement (after age 55 with 10 years of service or mandatory retirement at age 65). Starting with the 2013 grant, full vesting occurs for a termination due to normal retirement at age 65 (with 10 years of service) or upon mandatory retirement at age 65.
For RSRs, full vesting occurs for a termination due to death or disability or mandatory retirement at age 65, and prorated vesting for early retirement (age 55 with 10 years of service). For certain retention grants of RSRs, no vesting occurs upon termination due to early or mandatory retirement. Such retention grants were awarded to Mr. Palmer in 2010 and 2013, Ms. Flach in 2012, and Mr. Vice in 2011 and 2012.
|
|
Possible Accelerated Equity Vesting Due to Change in Control
|
The terms of equity awards to the NEOs under the 2001 Plan and the 2011 Plan provide for possible accelerated vesting of stock options, RSRs, and RPSRs when the Company is involved in certain types of change in control events, which are more fully described in such plans (e.g., certain business combinations after which the Company is not the surviving entity and the surviving entity does not assume the awards). Possible acceleration would occur with respect to options, RSRs and RPSRs in certain change in control events that result in a termination of the NEO (other than for cause) within the specified period (double trigger). The acceleration of awards require this double trigger, unless an acquiring company fails to assume the awards. In February 2013, the award terms were amended to provide that acceleration will not occur to the extent that it would result in an excise tax that decreases the after-tax value of the awards to an NEO.
In cases where acceleration occurs under these limited change in control provisions, vested stock options that are not exercised prior to one of these changes in control may be settled in cash and terminated. Payments for RPSRs and RSRs made upon one of these change in control events will be in full.
For purposes of estimating the payments due under RPSRs below, Company performance is assumed to be at target levels through the close of each three-year performance period.
The table below provides the estimated value of accelerated equity vesting and/or payments if such a change in control had occurred on December 31, 2013. The value of the accelerated vesting was computed using only the closing market price of the Company's common stock on December 31, 2013 ($114.61), with no consideration of an earnout percentage as previously described. The value for unvested RSRs and RPSRs is computed by multiplying $114.61 by the number of unvested shares that would vest. The value of unvested stock options equals the difference between the exercise price of each option and $114.61.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
RSRs
|
|
RPSRs
|
|
|
Name
|
|
Acceleration
of Vesting
($)
|
|
Acceleration
of Vesting
($)
|
|
Acceleration
of Vesting
($)
|
|
Total
($)
|
Wesley G. Bush (1)
|
|
4,913,963
|
|
|
16,502,923
|
|
|
19,343,303
|
|
|
40,760,189
|
|
James F. Palmer (2)
|
|
9,741,688
|
|
|
13,357,337
|
|
|
10,176,680
|
|
|
33,275,705
|
|
Gloria A. Flach
|
|
589,752
|
|
|
5,373,834
|
|
|
7,238,424
|
|
|
13,202,010
|
|
Linda A. Mills
|
|
1,105,707
|
|
|
6,414,492
|
|
|
10,176,680
|
|
|
17,696,879
|
|
Thomas E. Vice
|
|
737,138
|
|
|
6,403,146
|
|
|
8,560,679
|
|
|
15,700,963
|
|
|
|
(1)
|
On May 15, 2013, at the request of Mr. Bush the Board approved certain amendments to the terms of Mr. Bush's RPSR agreements. The terms applicable to the 2011 and 2012 RPSR grants were amended to provide that accelerated payments resulting from certain change in control events would be made only on a pro-rata basis. The amount reflected in the table reflects the value of the pro-rata payments.
|
|
|
(2)
|
Under the terms of his offer letter, Mr. Palmer would also receive a lump-sum payment of approximately $1,544,200 for the present value of his monthly benefit under the Supplemental Retirement Replacement Plan.
|
52
I
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
|
|
COMPENSATION DISCUSSION AND ANALYSIS | S
EVERANCE
P
ROGRAM
|
|
|
Termination Payments and Benefits
|
The following table provides estimated payments and benefits that the Company would provide each NEO if his or her employment terminated on December 31, 2013 for specified reasons, assuming that the price per share of the Company's common stock is $114.61, the closing market price as of that date. These payments and benefits are payable based on:
|
|
•
|
the 2001 Plan, the 2011 Plan and the terms and conditions of equity awards made pursuant to such plans; and
|
Due to the many factors that affect the nature and amount of any benefits provided upon the termination events discussed above, any actual amounts paid or distributed to NEOs may be different from the values shown in the table. Factors that may affect these amounts include timing during the year of the occurrence of the event, our stock price and the NEO's age. The amounts described below are in addition to an NEO's benefits described in the Pension Benefits and Nonqualified Deferred Compensation Tables, as well as benefits generally available to our employees such as distributions under our savings plan, disability or life insurance benefits and accrued vacation.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
I
53
|
|
COMPENSATION DISCUSSION AND ANALYSIS | S
EVERANCE
P
ROGRAM
|
Termination Payment Table
Potential Termination Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
Executive Benefits
|
|
Voluntary
Termination
($)
|
|
Involuntary Termination
Not For Cause (4)
($)
|
|
Post-CIC
Involuntary
or Good Reason
Termination (5)($)
|
|
Death or
Disability (6)
($)
|
Wesley G. Bush
|
Cash Severance
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Long-term Incentives (2)
|
|
0
|
|
|
26,220,191
|
|
|
40,760,189
|
|
|
33,088,081
|
|
Benefits and Perquisites
|
|
|
|
|
|
|
|
|
Retiree Medical and Life Insurance (6)
|
|
936,378
|
|
|
936,378
|
|
|
936,378
|
|
|
936,378
|
|
Medical/Dental Continuation
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
James F. Palmer
|
Cash Severance (1)
|
|
0
|
|
|
2,550,000
|
|
|
0
|
|
|
0
|
|
Long-term Incentives (2)
|
|
0
|
|
|
0
|
|
|
33,275,705
|
|
|
28,205,130
|
|
Benefits and Perquisites
|
|
|
|
|
|
|
|
|
Retiree Medical and Life Insurance (6)
|
|
551,044
|
|
|
551,044
|
|
|
551,044
|
|
|
551,044
|
|
Medical/Dental Continuation
|
|
0
|
|
|
30,570
|
|
|
0
|
|
|
0
|
|
Financial Planning/Income Tax
|
|
0
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
Outplacement Services
|
|
0
|
|
|
127,500
|
|
|
0
|
|
|
0
|
|
Gloria A. Flach
|
Cash Severance (1)
|
|
0
|
|
|
2,250,000
|
|
|
0
|
|
|
0
|
|
Long-term Incentives (2)
|
|
0
|
|
|
5,467,782
|
|
|
13,202,010
|
|
|
9,110,891
|
|
Benefits and Perquisites
|
|
|
|
|
|
|
|
|
Retiree Medical and Life Insurance
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Medical/Dental Continuation
|
|
0
|
|
|
14,221
|
|
|
0
|
|
|
0
|
|
Financial Planning/Income Tax
|
|
0
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
Outplacement Services
|
|
0
|
|
|
112,500
|
|
|
0
|
|
|
0
|
|
Linda A. Mills
|
Cash Severance (1)
|
|
0
|
|
|
2,325,000
|
|
|
0
|
|
|
0
|
|
Long-term Incentives (2)(3)
|
|
9,535,731
|
|
|
9,535,731
|
|
|
17,696,879
|
|
|
12,626,304
|
|
Benefits and Perquisites
|
|
|
|
|
|
|
|
|
Retiree Medical and Life Insurance
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Medical/Dental Continuation
|
|
0
|
|
|
30,570
|
|
|
0
|
|
|
0
|
|
Financial Planning/Income Tax
|
|
0
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
Outplacement Services
|
|
0
|
|
|
116,250
|
|
|
0
|
|
|
0
|
|
Thomas E. Vice
|
Cash Severance (1)
|
|
0
|
|
|
2,250,000
|
|
|
0
|
|
|
0
|
|
Long-term Incentives (2)
|
|
0
|
|
|
6,987,509
|
|
|
15,700,963
|
|
|
11,169,055
|
|
Benefits and Perquisites
|
|
|
|
|
|
|
|
|
Retiree Medical and Life Insurance
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Medical/Dental Continuation
|
|
0
|
|
|
42,175
|
|
|
0
|
|
|
0
|
|
Financial Planning/Income Tax
|
|
0
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
Outplacement Services
|
|
0
|
|
|
112,500
|
|
|
0
|
|
|
0
|
|
|
|
(1)
|
Cash Severance equals one and a half times the sum of the annual base salary and the target annual bonus, as of the effective date of termination.
|
|
|
(2)
|
Long-term Incentives include grants of RPSRs, stock options and RSRs.
|
|
|
(3)
|
Results in a benefit under Voluntary Termination only if eligible for retirement treatment under the terms and conditions of the grants (age 55 with 10 years of service).
|
|
|
(4)
|
Similar treatment provided for certain "good reason" terminations, as described in "Key Components of Our Programs - Severance Benefits"; however, there would be no termination payment in the event of an involuntary termination for cause.
|
|
|
(5)
|
The amounts assume full acceleration, which, as discussed above, may not occur to the extent that it would result in an excise tax that decreases the after-tax value of the awards to an NEO.
|
|
|
(6)
|
Retiree medical values for Mr. Bush and Mr. Palmer reflect cost associated with disability. If termination results from death, the retiree medical insurance expense would be less than the disability amount indicated. See "Key Components of Our Programs - Retiree Medical Arrangement" for details of the plan.
|
54
I
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
|
|
PROPOSAL THREE: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR
|
The Audit Committee proposes and recommends that the shareholders ratify the Audit Committee's appointment of Deloitte & Touche LLP (Deloitte) as our independent auditor for 2014. Deloitte served as our independent auditor for 2013. Although ratification is not required by our Bylaws or otherwise, the Audit Committee is submitting the selection of Deloitte to shareholders as a matter of good corporate governance. If the shareholders fail to ratify the appointment of Deloitte, the Audit Committee will consider this in its selection of auditors for the following year. A representative from Deloitte will attend the Annual Meeting and will have the opportunity to make a statement and respond to appropriate questions.
|
|
Audit Fees and All Other Fees
|
The following table summarizes aggregate fees billed for the years ended December 31, 2013 and 2012 by Deloitte, the member firms of Deloitte Touche Tohmatsu and their respective affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Audit Fees (a)
|
|
$
|
13,362,000
|
|
|
$
|
13,345,000
|
|
Audit-Related Fees (b)
|
|
760,000
|
|
|
770,000
|
|
Tax-Related Fees (c)
|
|
838,000
|
|
|
730,000
|
|
All Other Fees
|
|
—
|
|
|
—
|
|
Total Fees
|
|
$
|
14,960,000
|
|
|
$
|
14,845,000
|
|
|
|
(a)
|
Audit fees for 2013 and 2012 each reflect fees of $11,900,000 for the consolidated financial statement audits and include the audit of internal controls pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. Audit fees for 2013 and 2012 also include $1,381,000 and $1,445,000, respectively, for foreign statutory audits. Fees for foreign statutory audits are reported in the year in which the audits are performed. For example, foreign statutory audit fees reported in 2013 relate to audits of the Company's foreign entities for the fiscal year ended 2012. The remaining 2013 audit fees primarily relate to audit services associated with the Company's Form 8-K filing in connection with its debt issuance in May 2013.
|
|
|
(b)
|
Audit-related fees reflect fees for services that are reasonably related to the performance of the audit or review of the Company's financial statements, including fees related to independent assessment of controls concerning outsourcing activities of $760,000 and $770,000 for 2013 and 2012, respectively. Audit-related fees exclude fees that totaled $1,421,000 and $1,346,000 for 2013 and 2012, respectively, related to benefit plan audits which are paid for by the plans.
|
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(c)
|
Tax-related fees during 2013 and 2012 reflect fees of $838,000 and $730,000, respectively, for services concerning foreign income tax compliance, foreign Value Added Tax compliance and other tax matters.
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Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
|
It is the Audit Committee's policy to pre-approve all audit and permitted non-audit services provided by our independent auditor in order to provide reasonable assurance that the provision of these services does not impair the auditor's independence. These services may include audit services, audit-related services, tax-related services and other services. Pre-approval may be given at any time. The Audit Committee has delegated pre-approval authority for any individual project up to a pre-determined amount to the Chairperson of the Audit Committee.
The decisions of the Chairperson to pre-approve a permitted service are reported to the Audit Committee at its next meeting. The independent auditor is required to periodically report to the full Audit Committee regarding the extent of services provided by the independent auditor in accordance with this pre-approval policy, as well as the fees for the services performed to date.
The Audit Committee approved all audit and non-audit services provided by Deloitte, the member firms of Deloitte Touche Tohmatsu and their respective affiliates during 2013 and 2012, in each case before being engaged to provide those services.
Vote Required
Approval of this proposal requires that the votes cast "for" the proposal must exceed the votes cast "against" the proposal. Abstentions and broker non-votes will have no effect on this proposal.
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THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL THREE.
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
I
55
The Audit Committee of the Board of Directors is responsible for assisting the Board of Directors in fulfilling its oversight responsibilities over the Company's accounting, auditing and financial reporting processes and risk management process, and for monitoring compliance with certain regulatory and compliance matters. The Audit Committee's written charter describes the Audit Committee's responsibilities and has been approved by the Board of Directors.
Management is responsible for preparing the Company's financial statements and for the financial reporting process, including evaluating the effectiveness of the Company's disclosure controls and procedures and internal control over financial reporting.
Deloitte & Touche LLP (Deloitte), the Company's independent auditor, is responsible for performing an independent audit of the Company's consolidated financial statements and expressing an opinion on the conformity of the financial statements with accounting principles generally accepted in the United States of America, and on the effectiveness of the Company's internal control over financial reporting.
In connection with the preparation of the Company's financial statements as of and for the year ended December 31, 2013, the Audit Committee reviewed and discussed the audited financial statements with the Company's Chief Executive Officer, Chief Financial Officer and Deloitte. The Audit Committee also discussed with Deloitte the communications required under applicable professional auditing standards and regulations and, with and without management present, discussed and reviewed the results of Deloitte's examination of the financial statements. Additionally, the Audit Committee discussed with the Company's internal auditors the results of their audits completed during 2013.
The Audit Committee received the written disclosures and the letter from Deloitte required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent auditor's communications with the Audit Committee concerning independence. In addition, the Audit Committee discussed with Deloitte that firm's independence from the Company.
Based on the Audit Committee's review and discussions described in this report, the Audit Committee recommended to the Board of Directors that the audited financial statements for 2013 be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 for filing with the SEC. The Audit Committee also reappointed Deloitte to serve as the Company's independent auditors for 2014, and requested that this appointment be submitted to shareholders for ratification at the Annual Meeting.
AUDIT COMMITTEE
VICTOR H. FAZIO
STEPHEN E. FRANK
WILLIAM H. HERNANDEZ
MADELEINE A. KLEINER
AULANA L. PETERS
GARY ROUGHEAD
THOMAS M. SCHOEWE
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PROPOSAL FOUR: SHAREHOLDER PROPOSAL
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Mr. John Chevedden, 2215 Nelson Avenue, No. 205, Redondo Beach, California 90278, a beneficial owner of 100 shares of common stock of the Company, the proponent of a shareholder proposal, has stated that the proponent intends to present a proposal at the Annual Meeting. The proposal and supporting statement, for which the Board of Directors accepts no responsibility, is set forth below. The Board of Directors opposes the proposal for the reasons stated after this proposal.
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Proposal Four: Shareholder Proposal Regarding Independent Board Chairman
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Proposal 4 - Independent Board Chairman
RESOLVED: Shareholders request that our Board of Directors to adopt a policy, and amend other governing documents as necessary to reflect this policy, to require the Chair of our Board of Directors to be an independent member of our Board. This independence requirement shall apply prospectively so as not to violate any contractual obligation at the time this resolution is adopted. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. The policy should also specify how to select a new independent chairman if a current chairman ceases to be independent between annual shareholder meetings.
When our CEO is our board chairman, this arrangement can hinder our board’s ability to monitor our CEO’s performance. Many companies already have an independent Chairman. An independent Chairman is the prevailing practice in the United Kingdom and many international markets. This proposal topic won 50%-plus support at 5 major U.S. companies in 2013 including 73%-support at Netflix.
This topic is particularly important for Northrop Grumman because of the excessive pay of $37 million for our Chairman/CEO Wesley Bush. Plus we had a former CEO as our Lead Director - Donald Felsinger, previously the CEO/Chairman of Sempra. Additionally we had a weak board. GMI Ratings, an independent investment research firm, rated our board D. Director Aulana Peters had 21-years long-tenure (independence concern) and this was compounded by her service on our audit committee and the fact that she received our highest negative votes. Stephen Frank was also on our audit committee and received our 2
nd
highest negative votes.
Directors who were negatively flagged for their service on the boards of companies when they declared bankruptcy included: Karl Krapek at Visteon Corporation and Stephen Frank at Washington Mutual. The following directors were each on the boards of 3 or 4 total companies (over-commitment concern): Richard Myers, Aulana Peters, Bruce Gordon and William Hernandez.
This proposal should also be more favorably evaluated due to our Company’s clearly improvable environmental, social and corporate governance performance as reported in 2013:
Northrop lacked confidential shareholder voting and our CEO could receive long-term incentive pay for below-median job performance. Northrop was not a signatory of the UN Global Compact to maintain more effective sustainability practices. Northrop had not yet implemented OSHAS 18001 as its occupational health and safety management system, nor did it disclose its workplace safety record in its annual report.
Northrop was flagged by GMI for its limited efforts in the identification and use of alternative energy sources. Northrop had been flagged for its failure to establish specific environmental impact reduction targets, a critical practice for any company operating in a high environmental impact industry that is committed to its own long-term sustainability.
Returning to the core topic of this proposal from the context of our clearly improvable corporate governance, please vote to protect shareholder value:
Independent Board Chairman - Proposal 4
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Board of Directors' Statement in Opposition to Proposal Four
|
The Company
’
s shareholders have considered, and declined to provide majority support to, similar independent board chairman proposals at each of the prior two annual meetings, with approximately 29% of shareholders voting in favor of such proposal at the 2013 Annual Meeting.
The Board of Directors continues to oppose this proposal because it deprives the Board of important flexibility to determine the most effective leadership structure to serve the interests of the Company and its shareholders. The Board of Directors believes the Company and its shareholders are best served when it retains this flexibility.
Under our Principles of Corporate Governance, the Board has the authority to determine whether the positions of Chair and Chief Executive Officer should be held by the same or different persons. The Board has the flexibility to consider what is best for the
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
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57
|
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PROPOSAL FOUR: SHAREHOLDER PROPOSAL
|
Company and its shareholders, in light of all facts and circumstances known to the Board. In today
’
s environment, having considered the experience of the management team, the challenges facing the Company, and the evolving environment in which we operate, the Board has concluded that having the CEO also serve as Chair best positions the Company to be innovative, compete successfully and advance shareholder interests. The Board believes it is important, especially in our changing and challenging environment, to retain the flexibility to determine which structure is most effective.
The Board also does not believe the proposed change is necessary to ensure that the Board effectively monitors the performance of the CEO, contrary to what the proponent suggests. Today, twelve of the Company
’
s thirteen directors are independent, and the Board regularly holds scheduled sessions of the independent directors at each Board meeting. The Chairs and all members of the Compensation, Governance and Audit Committees are independent directors. The independent directors have ample opportunity to, and regularly do, assess the performance of the CEO and provide meaningful direction.
When the Chair is not independent, the Company
’
s bylaws specifically provide that the independent directors of the Board may designate a Lead Independent Director from among them. The Board has repeatedly exercised that authority and Donald E. Felsinger currently serves as our Lead Independent Director.
Our Principles of Corporate Governance prescribe the role of our Lead Independent Director. Among other duties, the Principles of Corporate Governance specify that the Lead Independent Director shall:
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•
|
preside at all meetings of the Board at which the Chair is not present, including executive sessions of the independent directors, serve as liaison between the Chair and the independent directors;
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•
|
approve meeting agendas and information sent to the Board and advise the Chair on these matters;
|
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|
•
|
approve the schedule of Board meetings to assure that there is suffi
cient time for discussion of all agenda items and advise the Chair on these matters;
|
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|
•
|
call meetings of the independent directors;
|
|
|
•
|
interview, along with the Chair of the Board and the Chair of the Governance Committee, Board candidates and make recommendations to the Committee and the Board; and
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•
|
if requested by major shareholders, ensure that he or she is available for consultation and direct communication. Any shareholder can communicate with the Lead Independent Director (or any of the directors) as described on page 15 of this Proxy Statement and on the Company
’
s website.
|
The designation of a Lead Independent Director by the independent directors of the Board demonstrates the Board’s continuing commitment to strong corporate governance, Board independence and the important role of Lead Independent Director.
In the supporting statement for the Proposal, the proponent offers a series of assertions that are largely incorrect and/or inapplicable. For example, the proponent claims that our CEO’s compensation is $37M. As disclosed in this proxy statement for the Company’s 2014 Annual Meeting of Shareholders, Mr. Bush’s total compensation for 2013, calculated in accordance with the Security and Exchange Commission’s regulations and reflected in the Company’s Summary Compensation Table, was $
18,656,412
; For 2012, it was $
24,459,344
. We strongly dispute various other of the proponents assertions. Correct facts regarding compensation for and the record of our leadership, as well as the Company’s successful commitment to robust governance and the environment, are set forth in detail earlier in this proxy and in the Company’s annual Corporate Responsibility Report.
The Board believes that the Company
’
s balanced and flexible corporate governance structure, including a Lead Independent Director with comprehensive and meaningful duties, makes it unnecessary and ill advised to have an absolute requirement that the Chair be an independent director. The Board believes that adopting such a rule would only limit the Board
’
s ability to select the director it believes best suited to serve as Chair of the Board, and is not in the best interests of the Company and its shareholders.
Vote required
Approval of this proposal requires that the votes cast "for" the proposal must exceed the votes cast "against" the proposal. Abstentions and broker non-votes will have no effect on this proposal.
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THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "AGAINST" THIS PROPOSAL.
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
We are not aware of any other business to be transacted at the Annual Meeting. Our Bylaws outline procedures, including minimum notice provisions, for shareholder nominations of directors and submission of other shareholder business to be transacted at the Annual Meeting. A copy of the pertinent Bylaw provisions is available on request to the Corporate Secretary,
Northrop Grumman Corporation, 2980 Fairview Park Drive, Falls Church, Virginia 22042
. Our Bylaws are also available in the Investor Relations section of our website at
www.northropgrumman.com
. If any other business properly comes before the Annual Meeting, the shares represented by proxies will be voted in accordance with the judgment of the persons authorized to vote them.
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Shareholder Proposals for 2015 Annual Meeting
|
Any shareholder who intends to present a proposal at the 2015 Annual Meeting must deliver the proposal to the Corporate Secretary at
Northrop Grumman Corporation, 2980 Fairview Park Drive, Falls Church, Virginia 22042
:
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•
|
not later than December 5, 2014, if the proposal is submitted for inclusion in the Company's proxy materials for that meeting pursuant to Rule 14a-8 under the Securities Exchange Act of 1934.
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•
|
not earlier than December 5, 2014 and not later than January 4, 2015, if the proposal is submitted pursuant to the Bylaws, but not pursuant to Rule 14a-8, in which case we are not required to include the proposal in our proxy materials.
|
Any shareholder who wishes to introduce a proposal should review our Bylaws and applicable proxy rules of the SEC.
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Shareholder Nominations for Director Election at 2015 Annual Meeting
|
Any shareholder who intends to nominate a person for election as a director at the 2015 Annual Meeting must deliver a notice of such nomination (along with certain other information required by our Bylaws) to the Corporate Secretary at
Northrop Grumman Corporation, 2980 Fairview Park Drive, Falls Church, Virginia 22042
, not earlier than December 5, 2014 and not later than January 4, 2015.
Some banks, brokers and other nominee record holders may be participating in the practice of "householding." This means that only one copy of the Notice of Internet Availability of Proxy Materials may have been sent to multiple shareholders in a household. We will promptly deliver a separate copy to a shareholder upon written or oral request to the Corporate Secretary at the following address:
Northrop Grumman Corporation, 2980 Fairview Park Drive, Falls Church, Virginia 22042 (703) 280-2900
. To receive separate copies of the notice in the future, or if a shareholder is receiving multiple copies and would like to receive only one copy for the household, the shareholder should contact his or her bank, broker or other nominee record holder, or may contact the Corporate Secretary at the above address.
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Cost of Soliciting Proxies
|
We will pay all costs of soliciting proxies. We have made arrangements with brokerage houses and other custodians, nominees and fiduciaries to make proxy materials available to beneficial owners. We will, upon request, reimburse them for reasonable expenses incurred. We have retained D.F. King & Co, Inc. of New York at an estimated fee of $17,500, plus reasonable disbursements to solicit proxies on our behalf. Our officers, directors and regular employees may solicit proxies personally, by means of materials prepared for shareholders and employee-shareholders or by telephone or other methods to the extent deemed appropriate by the Board of Directors.
No additional compensation will be paid to such individuals for this activity. The extent to which this solicitation will be necessary will depend upon how promptly proxies are received. We therefore urge shareholders to give voting instructions without delay.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
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59
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:
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•
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Principles of Corporate Governance;
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•
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Standards of Business Conduct;
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•
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Policy and Procedure Regarding Company Transactions with Related Persons; and
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•
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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 are designated as Section 16 officers under the Securities Exchange Act of 1934 (executive officers)) are disclosed in a Current Report on Form 8-K.
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Use of Non-GAAP Financial Measures
|
This Proxy Statement contains non-GAAP financial measures, as defined by SEC Regulation G. While we believe that these non-GAAP financial measures may be useful in evaluating our financial information, they should be considered as supplemental in nature and not as a substitute for financial information prepared in accordance with GAAP. Definitions for the non-GAAP measures contained in this Proxy Statement and reconciliations are provided below. Other companies may define these measures differently or may utilize different non-GAAP measures.
Cash provided by operating activities before discretionary pension contributions:
Cash provided by operating activities before the after-tax impact of discretionary pension contributions. Cash provided by operating activities before discretionary pension contributions has been provided for consistency and comparability of 2013 and 2012 financial performance and is reconciled below.
Free cash flow:
Cash provided by operating activities less capital expenditures (including outsourcing contract & related software costs). We use free cash flow as a key factor in our planning for, and consideration of, strategic acquisitions, stock repurchases and the payment of dividends. This measure should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating results presented in accordance with GAAP. Free cash flow from continuing operations is reconciled below.
Free cash flow provided by operating activities before discretionary pension contributions:
Free cash flow provided by operating activities before the after-tax impact of discretionary pension contributions. We use free cash flow provided by operating activities before discretionary pension contributions as a key factor in our planning for, and consideration of, strategic acquisitions, stock repurchases and the payment of dividends. This measure should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating results presented in accordance with GAAP. Free cash flow provided by operating activities before discretionary pension contributions is reconciled below.
Net FAS/CAS pension adjustment:
Pension expense determined in accordance with GAAP less pension expense allocated to the operating segments under U.S. Government Cost Accounting Standards (CAS). Net FAS/CAS pension adjustment is presented below.
After-tax net pension adjustment per share:
The per share impact of the net FAS/CAS pension adjustment as defined above, after tax at the statutory rate of 35%, provided for consistency and comparability of 2013 and 2012 financial performance as presented below.
Pension-adjusted diluted EPS:
Diluted EPS excluding the after-tax net pension adjustment per share, as defined above. These per share amounts are provided for consistency and comparability of operating results. Management uses pension-adjusted diluted EPS, as reconciled below, as an internal measure of financial performance.
Pension-adjusted net income:
Net income before the after-tax impact of the net FAS/CAS pension adjustment, as defined above. Management uses pension-adjusted net income as a metric for both top and bottom line performance. Pension-adjusted net income is reconciled below.
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
Pension-adjusted operating income:
Operating income before net FAS/CAS pension adjustment as reconciled below. Management uses pension-adjusted operating income as an internal measure of financial performance.
Pension-adjusted operating margin rate:
Pension-adjusted operating income as defined above, divided by sales. Management uses pension-adjusted operating margin rate, as reconciled below, as an internal measure of financial performance.
Segment operating income:
Total earnings from our four segments including allocated pension expense recognized under CAS. Reconciling items to operating income are unallocated corporate expenses, including unallowable or unallocable portions of management and administration, legal, environmental, certain compensation and retiree benefits, and other expenses; net FAS/CAS pension adjustment; and reversal of royalty income included in segment operating income. Management uses segment operating income, as reconciled below, as an internal measure of financial performance of our individual operating segments.
Segment operating margin rate:
Segment operating income as defined above, divided by sales. Management uses segment operating margin rate, as reconciled below, as an internal measure of financial performance.
Reconciliation of Non-GAAP Financial Measures
|
|
|
|
|
|
|
|
|
|
|
|
Total Year
|
($M)
|
|
2013
|
|
2012
|
Cash provided by operating activities before discretionary pension contributions
|
|
$
|
2,806
|
|
|
$
|
2,833
|
|
After-tax discretionary pension pre-funding impact
|
|
(323
|
)
|
|
(193
|
)
|
Net Cash provided by operating activities
|
|
2,483
|
|
|
2,640
|
|
Less:
|
|
|
|
|
Capital expenditures
|
|
(364
|
)
|
|
(331
|
)
|
Free cash flow
|
|
2,119
|
|
|
2,309
|
|
After-tax discretionary pension pre-funding impact
|
|
323
|
|
|
193
|
|
Free cash flow provided by operating activities before discretionary pension contributions
|
|
$
|
2,442
|
|
|
$
|
2,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Year
|
($M)
|
|
2013
|
|
2012
|
Segment Operating Income
|
|
$
|
3,080
|
|
|
$
|
3,176
|
|
Segment operating margin rate
|
|
12.5
|
%
|
|
12.6
|
%
|
Reconciliation to operating income
|
|
|
|
|
Unallocated corporate expenses
|
|
(119
|
)
|
|
(168
|
)
|
Net FAS/CAS pension adjustment
|
|
168
|
|
|
132
|
|
Other
|
|
(6
|
)
|
|
(10
|
)
|
Operating income
|
|
$
|
3,123
|
|
|
$
|
3,130
|
|
Operating margin rate
|
|
12.7
|
%
|
|
12.4
|
%
|
|
|
Total Year
|
($M)
|
|
2013
|
|
2012
|
Pension-adjusted Operating Highlights
|
|
|
|
|
Operating income
|
|
$
|
3,123
|
|
|
$
|
3,130
|
|
Net FAS/CAS pension adjustment
|
|
(168
|
)
|
|
(132
|
)
|
Pension-adjusted operating income
|
|
$
|
2,955
|
|
|
$
|
2,998
|
|
Pension-adjusted operating margin rate
|
|
12.0
|
%
|
|
11.9
|
%
|
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
I
61
|
|
|
|
|
|
|
|
|
|
|
|
Total Year
|
|
|
2013
|
|
2012
|
Pension-adjusted Per Share Data
|
|
|
|
|
Diluted EPS
|
|
$
|
8.35
|
|
|
$
|
7.81
|
|
After-tax net pension adjustment per share
|
|
(0.47
|
)
|
|
(0.34
|
)
|
Pension-adjusted diluted EPS
|
|
$
|
7.88
|
|
|
$
|
7.47
|
|
|
|
|
|
|
|
|
|
|
|
Total Year
|
($M)
|
|
2013
|
Net income
|
|
$
|
1,952
|
|
Net FAS/CAS pension adjustment
|
|
(109
|
)
|
Pension-adjusted net income
|
|
$
|
1,843
|
|
April 4, 2014
NOTICE: THE COMPANY FILED AN ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2013 ON FEBRUARY 3, 2014. SHAREHOLDERS OF RECORD ON MARCH 18, 2014 MAY OBTAIN A COPY OF THIS REPORT WITHOUT CHARGE FROM THE CORPORATE SECRETARY, NORTHROP GRUMMAN CORPORATION, 2980 FAIRVIEW PARK DRIVE, FALLS CHURCH, VIRGINIA 22042.
Jennifer C. McGarey
Corporate Vice President and Secretary
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND 2014 PROXY STATEMENT
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