Establishing Executive Compensation
The Company’s executive compensation program includes the following
linked elements:
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Annual Incentive Compensation
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Long-Term Incentive Compensation.
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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:
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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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