Establishing Executive Compensation
The Company's executive compensation program includes the following linked
elements:
Base Salary
Annual Incentive Compensation
Long-Term Incentive Compensation.
Base Salary
Annually, the Compensation Committee reviews, and accepts or modifies as it
deems appropriate, base salary recommendations submitted by the CEO for
executive officers (other than the CEO). Separately, the Compensation Committee
reviews the CEO's base salary, giving consideration to competitive compensation
data, its assessment of past performance and its expectation of future
contributions. The Committee then approves or modifies the CEO's recommendations
for the elected officers other than the CEO. The Board (independent directors
only) approves or modifies the Compensation Committee's recommendations for the
CEO.
Annual Incentive Compensation
Executives who are Section 162(m) officers are eligible for incentive
compensation annually under the Company's stockholder-approved 2002 Incentive
Compensation Plan. Performance criteria, as approved by shareholders, include
objective tests of financial performance. The Committee appropriates an amount
("Tentative Appropriated Incentive Compensation") to the Plan equal to two and
one-half percent (2½%) of the Company's Economic Earnings as defined by the
Plan.
As stipulated by the Plan, the maximum potential individual incentive
compensation award for a Performance Year for an executive officer shall be
limited to no more than thirty percent (30%) of the Tentative Appropriated
Incentive Compensation for the CEO and seventeen and one-half percent (17.5%)
for each of the other four Section 162(m) officers.
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Accompanying his annual performance report, the CEO submits recommendations to
the Compensation Committee for individual incentive awards for the executive
officers, except the CEO, which reflect judgments as to contributions to the
accomplishment of annual goals and the Company's long-term business plan.
Separately, the Compensation Committee considers an incentive compensation award
for the CEO based on its assessment of performance.
As part of this process, the Compensation Committee reviews the amount of the
total Tentative Appropriated Incentive Compensation for that Performance Year
and in its sole discretion may reduce (but not increase) that amount after
taking into account the overall performance of the Company in the attainment of
predetermined financial and non-financial objectives selected by the
Compensation Committee. Each executive officer's Incentive Compensation award is
based upon the foregoing and the Compensation Committee's assessment of the
individual's performance. The Board (independent directors only) must ratify the
incentive compensation award for the CEO.
Long-Term Incentive Compensation
In May 2003, the stockholders approved an amended and restated 2001 Long Term
Incentive Stock Plan. The amended Plan requested additional shares for future
grants to key employees. The Plan provides flexibility to grant awards in a
variety of forms including stock options, restricted stock rights (RSRs) and
restricted performance stock rights (RPSRs). The purpose of this compensation
component is to establish long-term performance horizons for participants. By
promoting ownership of the Company's common stock, the Plan creates
stockholder-managers interested in Northrop Grumman's sustained growth and
prosperity.
To further promote alignment of management and stockholder interests, in 2003
the Compensation Committee reviewed and approved new Stock Ownership Guidelines
for the CEO and other officers of the Company. These guidelines recommend that
officers own Company stock denominated as a multiple of their annual salaries,
accumulated over a five-year period, as follows: seven times annual salary for
the CEO; three times annual salary for other elected officers; and one and
one-half times annual salary for appointed officers.
In August 2003, awards of stock options and RPSRs were granted to the CEO,
executive officers and key employees under the terms of the 2001 Long Term
Incentive Stock Plan.
Chief Executive Officer Compensation
Effective April 1, 2003, Mr. Kresa retired as Chief Executive Officer, pursuant
to the Company's policy regarding the retirement of officers at age 65. Also on
that date, Dr. Sugar was elected to the position of Chief Executive Officer and
President.
After considering executive compensation survey data from nationally recognized
survey sources for the CEO position, the Compensation Committee recommended and
the Board approved a salary increase for Dr. Sugar effective April 1, 2003. Mr.
Kresa did not receive a salary increase in 2003 due to his retirement.
Pursuant to the retirement practices of the Company and under the terms of his
Transition Agreement, Mr. Kresa is eligible to receive an annual bonus for 2003
under the Company's 2002 Incentive Compensation Plan. The amount of such bonus
was prorated based on the length of time he was employed as CEO during 2003.
In considering both Mr. Kresa's and Dr. Sugar's performance and in establishing
their annual incentive compensation, the Compensation Committee reviewed the
overall Company performance against the 2003 financial and supplemental goals as
well as the respective contributions of Mr. Kresa and Dr. Sugar during the year.
The Compensation Committee noted that the Company exceeded all of the
Performance Measurement Criteria set forth at the beginning of the period.
Additionally, the Compensation Committee recognized that under Mr. Kresa's and
Dr. Sugar's leadership:
Northrop Grumman successfully completed several key objectives,
including the sale of the TRW Automotive unit to the Blackstone
Group; the reduction of a significant amount of debt; the sale
of
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three of the Company's commercial electronics businesses; and the
integration of the Company's two newest operating sectors, Mission
Systems and Space Technology.
Following years of major acquisitions and successful integration
of diverse businesses, Northrop Grumman generated 2003 revenues
of $26.2 billion. The Company began 2004 with a $58 billion
order backlog, and stands to benefit from increasing federal
spending on defense and homeland security.
The Missile Defense Agency awarded a Northrop Grumman and
Raytheon Company team a contract worth more than $4 billion to
develop the Kinetic Energy Interceptors, which will provide the
U.S. with the ability to destroy hostile missiles during the
boost/ascent phase of flight. The award was made possible by the
TRW acquisition and firmly establishes Northrop Grumman as a key
missile defense contractor.
Northrop Grumman achieved several additional milestones
throughout 2003, including the delivery of the USS Ronald Reagan
and the christening of the USS San Antonio, the first of a new
class of amphibious assault ships. The Company also delivered new
aircraft, spacecraft, missiles, radars and C4ISR systems.
Northrop Grumman in 2003 achieved a record-setting tenth CMMI
Level 5, the highest possible rating for benchmarking commercial
and defense industry best practices for management and
engineering. This marks the most Level 5 ratings earned by any
company in the defense and information technology industries to
date.
Northrop Grumman became the top subcontractor on the Future
Combat Systems (FCS) program, the U.S. Army's transformation
initiative, with awards that could top $450 million. Northrop
Grumman's Electronic Systems, Integrated Systems, Information
Technology and Mission Systems sectors serve as either prime
contractors or subcontractors on 10 of the FCS program's 21
concept and development teams.
Northrop Grumman played a vital role in support of Operation
Iraqi Freedom. Working closely with its customers, the Company
demonstrated the ability of a well-equipped military to transform
its operational capabilities in combat with unique and innovative
applications of Northrop Grumman products.
Northrop Grumman has successfully integrated disparate businesses
into a $26+ billion company that employs 122,600 people and has a
presence in every state and 25 countries. The Company now is the
largest manufacturing employer in Louisiana, Mississippi,
Virginia and Maryland. Northrop Grumman is the nation's largest
military shipbuilder; one of the two top federal information
technology providers; a premier aircraft, space and defense
contractor; and a top-tier airborne radar and electronic warfare
systems provider. In short, the Company has the most diversified
and balanced portfolio in the defense industry.
Based on its assessment, the Compensation Committee determined and the Board
ratified incentive compensation awards for Mr. Kresa and Dr. Sugar for 2003 as
depicted in the Summary Compensation Table.
THE COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE
JOHN T. CHAIN, JR. CHAIRMAN
LEWIS W. COLEMAN
PHILLIP FROST
JAY H. NUSSBAUM
KEVIN W. SHARER
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Stockholder Return Performance Presentation
The line graph below compares the relative change for the 5 year period ended
December 31, 2003 in the cumulative total stockholder return on the Company's
Common Stock against the cumulative total return of the S&P Composite-500 Stock
Index, and the S&P Aerospace/Defense Index comprised of The Boeing Company,
General Dynamics Corporation, Goodrich Corporation, Honeywell International
Inc., Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon
Company, Rockwell Collins, Inc. and United Technologies Corporation.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG NORTHROP GRUMMAN CORPORATION,
S&P 500 INDEX & S&P AEROSPACE/DEFENSE INDEX
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