DEF 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

Filed by the Registrant 

Filed by a Party other than the Registrant

Check the appropriate box:

 

  

Preliminary Proxy Statement

 

  

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

  

Definitive Proxy Statement

 

  

Definitive Additional Materials

 

   Soliciting Material Pursuant to §240.14a-12

Northrop Grumman Corporation

 

 

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LOGO


Table of Contents

 

LOGO

March 30, 2018

On behalf of the Board of Directors and management team, we cordially invite you to attend Northrop Grumman Corporation’s 2018 Annual Meeting of Shareholders. This year’s meeting will be held on Wednesday, May 16, 2018 at our principal executive office located at 2980 Fairview Park Drive, Falls Church, Virginia 22042 beginning at 8:00 a.m., Eastern Daylight Time.

We look forward to meeting those of you who are able to attend the meeting. For those who are unable to attend, live coverage of the meeting will be available on the Northrop Grumman website at www.northropgrumman.com.

At this meeting, shareholders will vote on matters set forth in the accompanying Notice of 2018 Annual Meeting of Shareholders and Proxy Statement. We will also provide a report on our Company and will entertain questions of general interest to the shareholders.

We are very pleased to report another year of outstanding performance for our shareholders, customers and employees. Excellent results from all three of our businesses combined to generate higher operating income, and before the impacts of the Tax Cuts and Jobs Act and our related discretionary pension contribution, higher earnings and cash generation than in 2016. Our capital deployment strategy continues to serve us and our shareholders well. Our robust capital expenditures reflect the quality of our opportunities and support our foundation for long-term profitable growth. In addition to these investments, we also took an important step to broaden our portfolio by reaching an agreement to acquire Orbital ATK. For our shareholders, we raised our quarterly dividend 11% and reduced our weighted-average diluted shares outstanding by 3%. In 2017, we returned more than $1 billion to our shareholders through dividends and share repurchases. Total shareholder return was 33.9% in 2017, another strong performance relative to our peers and the S&P 500.

In addition to strong financial and operational achievements, we continue to strengthen our corporate citizenship and sustainability efforts. For the sixth consecutive year, Northrop Grumman earned a leadership score in CDP’s 2017 climate change program; we were again included in the Dow Jones Sustainability Index for North America, and DiversityInc named us one of their Top 50 Companies for Diversity for the eighth consecutive year.

In 2017, as in prior years, we actively engaged with our shareholders on a variety of matters, including our strategy for long-term value creation and further aligning our governance, compensation and sustainability practices to support long-term profitable growth and value creation.

Your vote is important. Your proxy or voting instruction card includes specific information regarding the several ways to vote your shares. We encourage you to vote as soon as possible, even if you plan to attend the meeting. You may vote over the internet, by telephone or mobile device, by mailing a proxy or voting instruction card or in person at the Annual Meeting.

Thank you for your support and continued interest in Northrop Grumman Corporation.

 

Wes Bush

 

LOGO

 

Chairman and Chief Executive Officer

    

Donald E. Felsinger

 

LOGO

 

Lead Independent Director

 

NOTICE OF 2018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT | 


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LOGO

 

 

 Notice of 2018 Annual

 Meeting of Shareholders

 

Wednesday, May 16, 2018

8:00 a.m., Eastern Daylight Time

Northrop Grumman Corporation, Principal Executive Office

2980 Fairview Park Drive, Falls Church, Virginia 22042

The 2018 Annual Meeting of Shareholders (Annual Meeting) of Northrop Grumman Corporation (Company) will be held on Wednesday, May 16, 2018 at 8:00 a.m., Eastern Daylight Time, at our principal executive office located at 2980 Fairview Park Drive, Falls Church, Virginia 22042.

Shareholders of record at the close of business on March 20, 2018 are entitled to vote at the Annual Meeting. The following items are on the agenda:

 

  1. The election of the 12 nominees named in the accompanying Proxy Statement as directors to hold office until the 2019 Annual Meeting;

 

  2. A proposal to approve, on an advisory basis, the compensation of our named executive officers;

 

  3. A proposal to ratify the appointment of Deloitte & Touche LLP as our independent auditor for the year ending December 31, 2018;

 

  4. A shareholder proposal to modify the ownership threshold for shareholders to call a special meeting; and

 

  5. Any other business as may properly come before the Annual Meeting or any adjournment or postponement thereof.

All shareholders are invited to attend the Annual Meeting. To be admitted you will need proof of stock ownership and a form of photo identification. If your broker holds your shares in “street name,” you will also need proof of beneficial ownership of Northrop Grumman common stock.

We encourage all shareholders to vote on the matters described in the accompanying Proxy Statement. Please see the section entitled “Questions and Answers About the Annual Meeting” on page 69 for information about voting over the internet, by telephone or mobile device, by mailing a proxy or voting instruction card or by attending in person at the Annual Meeting.

By order of the Board of Directors,

 

LOGO

Jennifer C. McGarey

Corporate Vice President and Secretary

 

March 30, 2018

 

 

Important Notice Regarding the Availability of Proxy Materials for the Shareholders Meeting to be held on May 16, 2018: The Proxy Statement for the 2018 Annual Meeting of Shareholders and the Annual Report for the year ended December 31, 2017 are available at: www.edocumentview.com/noc.

 

 

NOTICE OF 2018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT | 


Table of Contents

 

 TABLE OF CONTENTS

 

 

  PROXY STATEMENT SUMMARY

      1  

 

 PROPOSAL ONE: ELECTION OF DIRECTORS

     6  

 

2018 Nominees for Director

     6  

 

 CORPORATE GOVERNANCE

     13  

 

Overview

     13  

 

Role of the Board

     13  

 

Board Leadership Structure

     14  

 

Committees of the Board of Directors

     15  

 

Board Meetings and Executive Sessions

     17  

 

Meeting Attendance

     17  

 

Director Independence

     17  

 

Director Election Process

     18  

 

Board Composition and Director Nominations

     18  

 

Director Qualifications

     19  

 

Director Orientation and Continuing Education

     19  

 

Board Membership and External Relationships

     20  

 

Effect of Failure to Receive the Required Vote or Obtain and Retain Security Clearance

     20  

 

Board and Committee Self-Evaluation

     20  

 

Succession Planning

     21  

 

Departure and Election of Directors

     21  

 

Communications with the Board of Directors

     21  

 

Corporate Responsibility and Sustainability

     22  

 

 COMPENSATION OF DIRECTORS

     23  

 

Stock Ownership Requirements and Anti-Hedging and Pledging Policy

     23  

 

2017 Director Compensation

     24  

 

 TRANSACTIONS WITH RELATED PERSONS AND CONTROL PERSONS

     26  

 

Related Person Transactions

     26  

 

Compensation Committee Interlocks and Insider Participation

     26  

 

Indemnification Agreements

     26  

 

 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     27  

 

 VOTING SECURITIES AND PRINCIPAL HOLDERS

     28  

 

Stock Ownership of Certain Beneficial Owners

     28  

 

Stock Ownership of Officers and Directors

     29  

 

 EQUITY COMPENSATION PLAN INFORMATION

     30  

 

 PROPOSAL TWO: ADVISORY VOTE ON COMPENSATION OF NAMED EXECUTIVE OFFICERS

     31  

 

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 TABLE OF CONTENTS

 

 

  EXECUTIVE COMPENSATION

      32  

 

Compensation Discussion and Analysis

     32  

 

Executive Summary

     33  

 

Key Principles

     36  

 

Key Components of Our Programs

     40  

 

Compensation Committee Report

     48  

 

Compensation Tables

     49  

 

Summary Compensation Table

     49  

 

Grants of Plan-Based Awards Table

     52  

 

Outstanding Equity Awards Table

     54  

 

Stock Vested Table

     55  

 

Pension Benefits

     56  

 

Nonqualified Deferred Compensation Table

     60  

 

CEO Pay Ratio

     61  

 

Termination Payments and Benefits

     62  

 

Termination Payment Table

     63  

 

 PROPOSAL THREE: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR

     64  

 

Audit Fees and All Other Fees

     64  

 

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services

     64  

 

 AUDIT COMMITTEE REPORT

     66  

 

 PROPOSAL FOUR: SHAREHOLDER PROPOSAL

     67  

 

 QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING

     69  

 

 MISCELLANEOUS

     72  

 

Voting on Other Matters

     72  

 

Shareholder Proposals for the 2019 Annual Meeting

     72  

 

Shareholder Nominations for Director Election at the 2019 Annual Meeting

     72  

 

Householding Information

     72  

 

Cost of Soliciting Proxies

     73  

 

Available Information

     73  

 

Incorporation by Reference

     73  

 

Annual Report

     73  

 

APPENDIX A - USE OF NON-GAAP FINANCIAL MEASURES

     A-1  

 

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 PROXY STATEMENT SUMMARY

 

 

This summary highlights information contained elsewhere in this Proxy Statement, reflecting business, compensation and corporate governance highlights. For additional information about these topics, please refer to the discussions contained in this Proxy Statement and in our Annual Report on Form 10-K for the year ended December 31, 2017 (2017 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC) on January 29, 2018. This Proxy Statement contains certain non-GAAP (accounting principles generally accepted in the United States of America) financial measures, which are identified with asterisks. For more information, including definitions, reconciliations to the most directly comparable GAAP measure and why we believe these measures may be useful to investors, see “Appendix A - Use of Non-GAAP Financial Measures.” We intend to mail a Notice of Internet Availability of Proxy Materials to shareholders of record and to make this Proxy Statement and accompanying materials available on the internet on or about March 30, 2018.

 2017 Performance Highlights (page 34)

 

Our focus on performance, portfolio and capital deployment continues to strengthen our foundation for long-term profitable growth and create value for our shareholders, customers and employees.

2017 was another year of strong performance for our company. All three of our sectors generated excellent results that contributed to a 5% sales increase and an 11.5% segment operating margin rate*. Excluding the impacts of 2017 tax reform and the related discretionary contribution we made to our pension plans, diluted EPS grew by 9% to $13.28*. As a result of our strong performance our 2017 total shareholder return (TSR) was 33.9% versus 21.8% for the S&P 500, the ninth consecutive year that our TSR has outperformed the S&P 500.

Our operations continued to generate strong cash flow. Before our discretionary pension contribution, cash provided by operations totaled $2.9 billion and free cash flow* totaled more than $2 billion. Our strong cash generation enabled us to continue deploying cash for the benefit of our customers, shareholders and employees. In 2017 our capital expenditures totaled $928 million and we invested $639 million in R&D. Our capital expenditures continue to be elevated as we invest to strengthen the foundation for long-term profitable growth and drive affordability for our customers. In addition to these investments in our business, we also reached an agreement to acquire Orbital ATK, which will enhance our position in the space, missile and missile defense market domains.

We continued to return cash to shareholders. 2017 share repurchases totaled $393 million, and dividends totaled $689 million, including an 11% increase in May, our 14th consecutive annual increase.

 

  33.9% Total   Shareholder   Return      

5% Sales increase  

to $25.8 billion  

 

Total backlog of  

$42.9 billion  

   

$689 million  

paid in dividends  

 

11% quarterly   dividend   increase, 14th   consecutive   annual increase  

 

    3% reduction in   weighted   average diluted   shares   outstanding      

Capital spending   of $928 million  

 

Internal R&D   spending of  

$639 million  

 

* This metric is a non-GAAP financial measure. For more information, see “Appendix A - Use of Non-GAAP Financial Measures.”

 

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 PROXY STATEMENT SUMMARY

 

 

 2017 Executive Compensation Highlights (page 33)

 

 

We are committed to performance-based executive compensation programs that align with shareholders’ interests and our strategy of investing for and delivering long-term profitable growth. In 2017, we refined the metrics and weightings of our annual and long-term incentives to continue to drive strong performance, while ensuring we invest for long-term profitable growth and maintain alignment with shareholders’ interests.

While we sustained strong financial performance in 2017, our 2017 Annual Incentive Plan (AIP) payout declined to 131%, from 160% in 2016. Our Long-Term Incentive Plan (LTIP) payout is 150% compared to 148% in 2016 for named executive officers (NEOs). We ranked in the 89th percentile for three-year TSR performance relative to the 2015 Performance Peer Group identified on page 38 and ranked in the 96th percentile for three-year TSR performance relative to the S&P Industrials. Following are some governance principles of our 2017 executive compensation programs:

 

 

    70% of Annual     LTIP Equity
Grant

Performance-

Based

   
 

Stock

Ownership Guidelines for
All Officers:

CEO 7x

    Other NEOs 3x    

 

 

 

3-Year

Mandatory

    Holding Period     for 50% of

Vested Shares

 

 

 

    Recoupment     Policy

on Incentive

Payouts

 

 

 

    No Individual     Change in

Control

Agreements

               

 Board Nominees (pages 6-12)

 

 

 

 Name

 

  Age (1)

 

  Director
since

 

  Professional Background

 

  Committee Memberships  

 

Other Public
Company

        Audit

 

  Comp

 

  Gov

 

  Policy

 

  Boards

 

 

Wesley G. Bush

 

 

56

 

 

2009

 

 

Chairman and CEO, Northrop Grumman Corporation

 

 

 

 

 

 

 

 

 

 

1

 

Marianne C. Brown

 

 

59

 

 

2015

 

 

Co-Chief Operating Officer, Global Financial Solutions, Fidelity National Information Services, Inc.

 

 

LOGO

     

 

LOGO

 

 

 

Donald E. Felsinger

 

 

70

 

 

2007

 

 

Lead Independent Director, Northrop Grumman Corporation; Former Chairman and CEO, Sempra Energy

   

 

LOGO

 

 

LOGO

   

 

2

 

Ann M. Fudge

 

 

66

 

 

2016

 

 

Former Chairman and Chief Executive Officer, Young & Rubicam Brands

 

 

LOGO

     

 

LOGO

 

 

2

 

Bruce S. Gordon

 

 

72

 

 

2008

 

 

Former President, Retail Markets Group, Verizon Communications Inc.; Former President and CEO, NAACP

   

 

LOGO

   

 

LOGO

 

 

1

 

William H. Hernandez

 

 

69

 

 

2013

 

 

Former Senior Vice President and CFO, PPG Industries, Inc.

 

 

LOGO

   

 

LOGO

   

 

2

 

Madeleine A. Kleiner

 

 

66

 

 

2008

 

 

Former Executive Vice President and General Counsel, Hilton Hotels Corporation

 

 

LOGO

   

 

LOGO

   

 

1

 

Karl J. Krapek

 

 

69

 

 

2008

 

 

Former President and COO, United Technologies Corporation

   

 

LOGO

 

 

LOGO

   

 

2

 

Gary Roughead

 

 

66

 

 

2012

 

 

Retired Admiral, United States Navy and Former Chief of Naval Operations

   

 

LOGO

 

 

LOGO

   

 

 

Thomas M. Schoewe

 

 

65

 

 

2011

 

 

Former Executive Vice President and CFO, Wal-Mart Stores, Inc.

   

 

LOGO

   

 

LOGO

 

 

2

 

James S. Turley

 

 

62

 

 

2015

 

 

Former Chairman and Chief Executive Officer, Ernst & Young

 

 

LOGO

   

 

LOGO

   

 

3

 

Mark A. Welsh III

 

 

64

 

 

2016

 

 

Dean of the Bush School of Government and Public Service, Texas A&M University; Retired General, United States Air Force and Former Chief of Staff, United States Air Force

 

 

LOGO

         

 

LOGO

 

 

 

 

(1)   Age as of March 30, 2018.     LOGO   =  Chair   LOGO   =  Member

In accordance with our retirement policy, Victor H. Fazio, a director who served during 2017, will not stand for re-election at the 2018 Annual Meeting as he will have attained his 75th birthday prior to the Annual Meeting.

 

| NOTICE OF 2018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


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 PROXY STATEMENT SUMMARY

 

 

 Board Nominee Highlights

 

 

The charts below reflect the tenure, independence and broad experience of our board nominees.

 

Director Tenure

 

LOGO

 

  

Director Independence

 

LOGO

 

LOGO    LOGO

Director Experience

 

LOGO

 

LOGO

 

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 PROXY STATEMENT SUMMARY

 

 

 Governance Highlights (pages 13-22)

 

 

We are committed to high standards of corporate governance and have a robust corporate governance program intended to promote the long-term success of our Company. Some highlights of our corporate governance practices are listed below.

 

Board

Structure and  

Governance  

        

 

 The Board is approximately 92% independent.

 

 Each of the Audit, Compensation, Governance and Policy Committees is comprised entirely of independent directors.

 

 Our policy limits the number of boards on which our directors serve (no more than three other public company boards without special approval) to avoid overboarding.

 

 The independent directors regularly hold both executive sessions led by our Chairperson and independent sessions led by our Lead Independent Director.

 

 Our Lead Independent Director, appointed annually by the independent directors, is empowered with a robust set of responsibilities and provides additional independent oversight of senior management and Board leadership.

 

 All directors are elected annually based on a majority voting standard in uncontested elections, with a director resignation policy if a director fails to receive a majority of votes cast “for” his or her election.

 

 The Board nominees reflect a balanced mix of directors with deep Company and industry knowledge, and fresh and diverse perspectives, with an average director tenure of 6.5 years.

 

 The Board and each Committee annually conduct a thorough self-assessment process focused on Board or Committee performance, respectively. In addition, each director completes an individual director evaluation for each of the other directors and receives feedback on his or her own performance.

 

 Wehave a director retirement policy for directors that reach the age of 75 and are committed to Board refreshment, with the addition of five new directors to the Board in the last five years.

 

   
Shareholder Rights    

 

 The Board has adopted a robust proxy access bylaw provision, allowing eligible shareholders to include their own director nominees in the Company’s proxy materials.

 

 Shareholders holding at least 25% of our common stock have the right to call a special meeting.

 

 Shareholders holding at least 25% of our common stock have the right to take action by written consent.

 

   

Corporate  

Responsibility  

and  

Sustainability  

   

 

 We have a strong ethics program with standards of business conduct that help guide and promote good governance, responsible business practices and the highest standards of integrity throughout the Company.

 

 We publish an annual corporate responsibility report highlighting aspects of our social, environmental and governance performance and engage an independent external review panel to provide feedback and advice on our report.

 

 We integrate environmental sustainability into our organizational culture, minimizing our environmental footprint and driving affordability. Our executive officers are accountable for achieving environmental sustainability goals, which are one of our six non-financial corporate performance metrics.

 

 We disclose our political contributions policy and various trade association memberships on our website.

 

 We have a robust recoupment policy which provides the Board of Directors with the ability to recoup the incentive compensation of elected officers under certain circumstances.

 

   
Stock Ownership    

 

 We have stock ownership guidelines of 7x base salary for the CEO and 3x base salary for other named executive officers, as well as stock holding requirements of three years from the vesting date.

 

 We have stock ownership guidelines of 5x the annual cash retainer for our non-employee directors.

 

 We prohibit hedging and pledging of our common stock by directors and executive officers.

 

 

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 PROXY STATEMENT SUMMARY

 

 

 Shareholder Engagement

 

 

We regularly engage with our shareholders to understand their perspectives on our Company, including our strategies, performance, issues of governance and corporate responsibility, and executive compensation. This ongoing dialogue, in which both members of management and directors participate, has helped inform the Board’s decision-making and ensure our interests remain well-aligned with those of our shareholders.

Since our 2017 annual meeting, we have offered to engage on governance-related topics with shareholders representing approximately 60% of our outstanding shares. We have met with shareholders representing more than 30% of our outstanding shares to learn their perspectives on the Company and governance-related topics. While a number of our shareholders did not request meetings, we believe it is a best practice to offer engagement to shareholders representing a majority of our shares outstanding. These efforts are in addition to normal course outreach conducted by our Investor Relations team and members of senior management with portfolio managers and analysts, which are primarily focused on strategy and Company performance. We also meet with shareholders at investor conferences held throughout the year.

The Company has a substantial record of adopting provisions or modifying practices with the benefit of, and to reflect, shareholder input. Examples include provisions regarding proxy access, the right of shareholders to call a special meeting and the right of shareholders to act by written consent, as well as the use of full value shares and performance-based long-term incentives for our executives.

 Annual Shareholders’ Meeting

 

 

 

Time:  May 16, 2018, 8:00 a.m., Eastern Daylight Time

   Record Date:  You can vote if you were a shareholder of record at the close of business on March 20, 2018.

Place:  Northrop Grumman Corporation

            2980 Fairview Park Drive

            Falls Church, Virginia 22042

   Admission:  You will need proof of stock ownership and a form of photo identification.

 Voting Matters and Board Recommendations

 

 

 

      Board Vote Recommendation        Page  
Reference  
 

 

Proposal One: Election of Directors

 

  

 

 

 

 

FOR each Director Nominee

 

 

 

 

    

 

 

 

 

6  

 

 

 

 

 

Proposal Two: Advisory Vote on Compensation of Named Executive Officers

 

  

 

 

 

 

FOR

 

 

 

 

    

 

 

 

 

31  

 

 

 

 

 

Proposal Three: Ratification of Appointment of Independent Auditor

 

  

 

 

 

 

FOR

 

 

 

 

    

 

 

 

 

64  

 

 

 

 

 

Proposal Four: Shareholder Proposal to Modify Ownership Threshold for Shareholders to Call a Special Meeting

 

  

 

 

 

 

AGAINST

 

 

 

 

    

 

 

 

 

67  

 

 

 

 

 

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 PROPOSAL ONE: ELECTION OF DIRECTORS

 

 

 2018 Nominees for Director

 

Our Board has nominated 12 directors for election at the Annual Meeting. Each of the director nominees has consented to serve, and we do not know of any reason why any of them would be unable to serve, if elected. If a nominee becomes unavailable or unable to serve before the Annual Meeting (for example, due to serious illness), the Board may determine to leave the position vacant, reduce the number of authorized directors or designate a substitute nominee. If any nominee becomes unavailable for election to the Board, an event which is not anticipated, the proxyholders will have full discretion and authority to vote, or refrain from voting, for any other nominee in accordance with their judgment.

The following pages contain biographical and other information about each of the nominees. In addition, we have provided information regarding some of the particular experiences, qualifications, attributes and skills that led the Board to conclude that each nominee should serve as a director.

Unless instructed otherwise, the proxyholders will vote the proxies received by them “FOR” the election of the director nominees listed below.

 

WESLEY G. BUSH, 56

 

LOGO

 

  

 

Chairman and Chief Executive Officer, Northrop Grumman Corporation.

 

Director since 2009

 

Mr. Wesley G. Bush has served as Chief Executive Officer of the Company since January 2010. He was elected to the Board of Directors in 2009 and elected Chairman of the Board of Directors in July 2011. Mr. Bush served as Chief Executive Officer and President of the Company from January 2010 through December 31, 2017, as President and Chief Operating Officer of the Company from March 2007 through December 2009, as President and Chief Financial Officer from May 2006 through March 2007, and as Corporate Vice President and Chief Financial Officer from March 2005 to May 2006. Following the acquisition of TRW Inc. (TRW) by the Company, he was named Corporate Vice President and President of the Space Technology sector. Mr. Bush joined TRW in 1987 and during his career with that company held various leadership positions, including President and CEO of TRW Aeronautical Systems. He is a director of Norfolk Southern Corporation. He serves on the boards of several non-profit organizations, including the Aerospace Industries Association, the Business-Higher Education Forum, Conservation International, INOVA Health Systems, the Naval Academy Foundation and the USO.

 

Attributes, Skills and Qualifications

 

· Significant business experience with over 35 years in the aerospace and defense industry

 

· Prior leadership positions within Northrop Grumman (including as President, Chief Operating Officer, Chief Financial Officer and Sector President)

 

· Extensive international business experience

 

· Extensive leadership roles in community service

 

 

 

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Table of Contents

 

 PROPOSAL ONE: ELECTION OF DIRECTORS

  

 

 

MARIANNE C. BROWN, 59

 

 

LOGO

 

  

 

Co-Chief Operating Officer, Global Financial Solutions, Fidelity National Information Services, Inc., a financial services technology solutions provider.

 

Director since 2015

 

Member of the Audit Committee and Policy Committee

 

Ms. Marianne C. Brown has served as Co-Chief Operating Officer, Global Financial Solutions, of Fidelity National Information Services, Inc. since January 2018. Prior to that, Ms. Brown served as Chief Operating Officer, Institutional and Wholesale Business of Fidelity National Information Services since December 2015, when it acquired SunGard Financial Systems. Ms. Brown was Chief Operating Officer of SunGard Financial Systems, a software and IT services provider, from February 2014 to November 2015. Prior to that, Ms. Brown was the CEO and president of Omgeo, a global financial services technology company, from March 2006 to February 2014. Before joining Omgeo, she was the CEO of the Securities Industry Automation Corporation. Ms. Brown began her career at Automatic Data Processing (ADP) and progressed through a series of positions of increasing responsibility culminating in her role as general manager of ADP’s Brokerage Processing Services business, which was subsequently spun off to become Broadridge Financial Solutions. Ms. Brown is a Senior Advisor to Pro Mujer.

 

Attributes, Skills and Qualifications

 

·   Substantial business experience as Chief Operating Officer and as a former Chief Executive Officer

 

·   Significant experience in IT goods and services and business management

 

·   Community and philanthropic leader

 

 

 

DONALD E. FELSINGER, 70

 

 

LOGO

 

  

 

Lead Independent Director of the Board of Directors, Northrop Grumman Corporation.

 

Former Chairman and Chief Executive Officer, Sempra Energy, an energy services holding company.

 

Director since 2007

 

Member of the Compensation Committee and Governance Committee

 

Mr. Donald E. Felsinger is the former Chairman and Chief Executive Officer of Sempra Energy. From July 2011 through his retirement in November 2012, he served as Executive Chairman of the Board of Directors of Sempra Energy, and from February 2006 through June 2011, he was Sempra’s Chairman and CEO. Prior to that, Mr. Felsinger was President and Chief Operating Officer of Sempra Energy from January 2005 to February 2006 and a member of the Board of Directors. From 1998 through 2004, he was Group President and Chief Executive Officer of Sempra Global. Prior to the merger that formed Sempra Energy, he served as President and Chief Operating Officer of Enova Corporation, the parent company of San Diego Gas & Electric (SDG&E). Prior positions included President and Chief Executive Officer of SDG&E, Executive Vice President of Enova Corporation and Executive Vice President of SDG&E. Mr. Felsinger serves on the boards of Archer-Daniels-Midland (Lead Independent Director) and Gannett Co., Inc.

 

Attributes, Skills and Qualifications

 

·   Extensive business experience as Chief Executive Officer, a board member and Chairman of other Fortune 500 companies in regulated industries

 

·   Significant experience in corporate governance and strategy, and as Lead Independent Director of a Fortune 250 company

 

·   In-depth knowledge of executive compensation and benefits

 

 

 

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 PROPOSAL ONE: ELECTION OF DIRECTORS

  

 

 

ANN M. FUDGE, 66

 

 

LOGO

 

  

 

Former Chairman and Chief Executive Officer, Young & Rubicam Brands, a marketing communications company.

 

Director since 2016

 

Member of the Audit Committee and Policy Committee

 

Ms. Ann M. Fudge served as Chairman and Chief Executive Officer of Young & Rubicam Brands at WPP Group PLC from May 2003 to December 2006. Prior to that, she served in various leadership positions at Kraft Foods from 1986 to 2001, including President of Beverages, Desserts and Post Divisions, and President of Maxwell House Coffee and Kraft General Foods. From 1977 to 1986, Ms. Fudge held a variety of marketing positions at General Mills. She is a director of Unilever NV and Novartis AG, and served as a director of General Electric Company and Infosys Limited during the last five years. Ms. Fudge also serves as a trustee of WGBH Public Media and the Brookings Institution. Ms. Fudge also serves on the Advisory Board of the Smithsonian Museum of African American History and Culture, and as Chair of the U.S. Programs Advisory Panel of the Gates Foundation.

 

Attributes, Skills and Qualifications

 

·   Extensive business experience as former Chief Executive Officer and former president of leading consumer products business units

 

·   Substantial international experience through service as an executive and director of a large multinational company and a director of other large multinational companies

 

·   Significant public company board experience

 

 

 

BRUCE S. GORDON, 72

 

 

LOGO

 

  

 

Former President, Retail Markets Group, Verizon Communications Inc., a telecommunications company, and Former President & CEO, NAACP.

 

Director since 2008

 

Member of the Compensation Committee and Policy Committee (Chair)

 

Mr. Bruce S. Gordon served as President and Chief Executive Officer of the National Association for the Advancement of Colored People from June 2005 to March 2007. In 2003, Mr. Gordon retired from Verizon Communications Inc., where he had served as President, Retail Markets Group since 2000. Prior to that, Mr. Gordon served as Group President of the Enterprise Business Unit, President of Consumer Services, Vice President of Marketing and Sales and Vice President of Sales for Bell Atlantic Corporation (Verizon’s predecessor). He is a member of the board of directors of the Newport Festival Foundation and a member of the Executive Leadership Council. Mr. Gordon is a director of CBS Corporation, and served as the Non-Executive Chair of The ADT Corporation during the last five years. He currently serves as a diversity consultant to several Fortune 500 companies.

 

Attributes, Skills and Qualifications

 

·   Extensive leadership and business skills acquired from his experience with corporate and non-profit enterprises

 

·   National leader on issues of diversity and inclusion

 

·   Significant board experience, including as non-executive chair

 

 

 

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 PROPOSAL ONE: ELECTION OF DIRECTORS

  

 

 

WILLIAM H. HERNANDEZ, 69

 

LOGO

 

  

 

Former Senior Vice President and Chief Financial Officer, PPG Industries, Inc., a manufacturer of chemical and industrial products.

 

Director since 2013

 

Member of the Audit Committee (Chair) and Governance Committee

 

Mr. William H. Hernandez served as Senior Vice President, Finance, and Chief Financial Officer of PPG Industries, Inc. (PPG), from 1995 until his retirement in 2009. Prior to that, he was PPG’s corporate controller from 1990 to 1994. Mr. Hernandez previously held a number of positions with Borg-Warner Corporation and Ford Motor Company. Mr. Hernandez is a certified management accountant and has taught finance and management courses at Marietta College. He is a member of the board of directors of Albemarle Corporation and USG Corporation and served as director of Black Box Corporation and Eastman Kodak during the last five years.

 

Attributes, Skills and Qualifications

 

·   Extensive experience and expertise in areas of finance, accounting and business management acquired as Chief Financial Officer of PPG Industries

 

·   Significant experience in areas of risk management

 

·   Audit committee financial expert

 

 

 

MADELEINE A. KLEINER, 66

 

 

LOGO

 

  

 

Former Executive Vice President and General Counsel, Hilton Hotels Corporation, a hotel and resort company.

 

Director since 2008

 

Member of the Audit Committee and Governance Committee (Chair)

 

Ms. Madeleine A. Kleiner served as Executive Vice President, General Counsel and Corporate Secretary for Hilton Hotels Corporation from January 2001 until February 2008. From 1999 through 2001, she served as a director of a number of Merrill Lynch mutual funds operating under the Hotchkis and Wiley name. Ms. Kleiner served as Senior Executive Vice President, Chief Administrative Officer and General Counsel of H.F. Ahmanson & Company and its subsidiary, Home Savings of America, until the company was acquired in 1998, and prior to that was a partner at the law firm of Gibson, Dunn and Crutcher where she advised corporations and their boards primarily in the areas of mergers and acquisitions, corporate governance and securities transactions and compliance. Ms. Kleiner currently serves on the board of directors of Jack in the Box Inc. Ms. Kleiner is a member of the board of the New Village Charter School.

 

Attributes, Skills and Qualifications

 

·   Expertise in corporate governance, Sarbanes-Oxley controls, risk management, securities transactions and mergers and acquisitions

 

·   Significant experience from past roles as general counsel for two public companies, outside counsel to numerous public companies and through service on another public company board

 

·   Audit committee financial expert

 

 

 

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 PROPOSAL ONE: ELECTION OF DIRECTORS

  

 

 

KARL J. KRAPEK, 69

 

 

LOGO

 

  

 

Former President and Chief Operating Officer, United Technologies Corporation, an aerospace and building systems company.

 

Director since 2008

 

Member of the Compensation Committee (Chair) and Governance Committee

 

Mr. Karl J. Krapek served as President and Chief Operating Officer of United Technologies Corporation from 1999 until his retirement in January 2002. At United Technologies Corporation, he served for 20 years in various leadership positions, including Executive Vice President and director in 1997, President and Chief Executive Officer of Pratt & Whitney in 1992, Chairman, President and Chief Executive Officer of Carrier Corporation in 1990 and President of Otis Elevator Company in 1989. Prior to joining United Technologies Corporation, he was Manager of Car Assembly Operations for the Pontiac Motor Car Division of General Motors Corporation. In 2002, Mr. Krapek became a co-founder of The Keystone Companies, which develops residential and commercial real estate. He chairs the Strategic Planning Committee for the board of directors at Trinity Health of New England. Mr. Krapek is a director of Prudential Financial, Inc. and Pensare Acquistion Corp.

 

Attributes, Skills and Qualifications

 

·   Extensive industry experience and leadership skills

 

·   Deep operational experience in aerospace and defense, domestic and international business operations and technology and lean manufacturing

 

·   Significant public company board experience, including serving as Lead Independent Director

 

 

 

 

GARY ROUGHEAD, 66

 

 

LOGO

 

  

 

Admiral, United States Navy (Ret.) and Former Chief of Naval Operations.

 

Director since 2012

 

Member of the Compensation Committee and Governance Committee

 

Admiral Gary Roughead retired from his position as the 29th Chief of Naval Operations in September 2011, after serving in that position for four years. The Chief of Naval Operations is the senior military position in the United States Navy. As Chief of Naval Operations, Admiral Roughead stabilized and accelerated ship and aircraft procurement plans and the Navy’s capability and capacity in ballistic missile defense and unmanned air and underwater systems. He restructured the Navy to address the challenges and opportunities in cyber operations. Prior to becoming the Chief of Naval Operations, he held six operational commands (including commanding both the Atlantic and Pacific Fleets). Admiral Roughead is a Robert and Marion Oster Distinguished Military Fellow at the Hoover Institution. He is a director of Maersk Lines, Ltd. He also serves as a trustee of the Dodge and Cox Funds. He is a director of the Center for a New American Security, and serves on the Board of Managers of the Johns Hopkins University Applied Physics Lab.

 

Attributes, Skills and Qualifications

 

·   Extensive career as a senior military officer with the United States Navy, including numerous operational commands, as well as leadership positions, most recently as the 29th Chief of Naval Operations

 

·   Significant expertise in national security, information warfare, cyber operations and global security issues

 

·   Broad experience in leadership and matters of global relations, particularly in the Pacific region, Europe and the Middle East

 

 

 

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 PROPOSAL ONE: ELECTION OF DIRECTORS

  

 

 

THOMAS M. SCHOEWE, 65

 

 

LOGO

 

  

 

Former Executive Vice President and Chief Financial Officer, Wal-Mart Stores, Inc., an operator of retail stores.

 

Director since 2011

 

Member of the Compensation Committee and Policy Committee

 

Mr. Thomas M. Schoewe was Executive Vice President and Chief Financial Officer of Wal-Mart Stores Inc. from 2000 to 2011. Prior to his employment with Wal-Mart, he held several roles at the Black and Decker Corporation, including Senior Vice President and Chief Financial Officer from 1996 to 1999, Vice President and Chief Financial Officer from 1993 to 1999, Vice President of Finance from 1989 to 1993 and Vice President of Business Planning and Analysis from 1986 to 1989. Before joining Black and Decker, Mr. Schoewe worked for Beatrice Companies, where he was Chief Financial Officer and Controller of one of its subsidiaries, Beatrice Consumer Durables Inc. Mr. Schoewe serves on the Boards of Directors of General Motors Corporation and Kohlberg Kravis Roberts and Company. Mr. Schoewe also serves on the board of the Ladies Professional Golf Association.

 

Attributes, Skills and Qualifications

 

·   Extensive financial experience acquired through positions held as the Chief Financial Officer of large public companies, as well as expertise in Sarbanes-Oxley controls, risk management and mergers and acquisitions

 

·   Significant international experience through his service as an executive of large public companies with substantial international operations

 

·   Experience at Wal-Mart and Black and Decker on large-scale transformational enterprise information technology implementations

 

·   Extensive experience as a member of the audit and risk committees of other public companies

 

 

 

JAMES S. TURLEY, 62

 

 

LOGO

 

  

 

Former Chairman and Chief Executive Officer, Ernst & Young, a professional services organization.

 

Director since 2015

 

Member of the Audit Committee and Governance Committee

 

Mr. James S. Turley served as Chairman and Chief Executive Officer of Ernst & Young from 2001 until his retirement in 2013. Mr. Turley joined Ernst & Young in 1977 and held various positions there until being named regional managing partner for the Upper Midwest in 1994, and for New York in 1998. He was named Deputy Chairman in 2000. He currently serves on the Boards of Directors of Citigroup, Emerson Electric Company and Intrexon Corporation. He also serves on the Board of Directors of the Boy Scouts of America. Mr. Turley is a board member of Kohler Co. and serves as Non-Executive Chair of Sita Capital Partners LLP.

 

Attributes, Skills and Qualifications

 

·   Extensive experience and expertise in areas of finance, accounting and business management acquired over 36-year career at Ernst & Young, including serving as Chairman and Chief Executive Officer of Ernst & Young

 

·   Significant experience in areas of risk management

 

·   Extensive experience as a member of the audit committee of other public companies

 

·   Audit committee financial expert

 

 

 

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 PROPOSAL ONE: ELECTION OF DIRECTORS

  

 

 

MARK A. WELSH III, 64

 

 

LOGO

 

  

 

Dean of the Bush School of Government and Public Service, Texas A&M University; General, United States Air Force (Ret.); Former Chief of Staff, United States Air Force.

 

Director since 2016

 

Member of the Audit Committee and Policy Committee

 

General Mark A. Welsh III was appointed as the new Dean of the Bush School of Government and Public Service effective August 15, 2016. Prior to his current position, General Welsh served as Chief of Staff of the United States Air Force, the senior uniformed Air Force officer responsible for the organization, training and equipping of active-duty, Guard, Reserve and civilian forces serving in the United States and overseas. During his long career, General Welsh also served as a member of the Joint Chiefs of Staff, Commander of the United States Air Forces in Europe and Commander of NATO’s Air Command, Associate Director for Military Affairs at the Central Intelligence Agency and Commandant of the United States Air Force Academy. General Welsh is a member of the Board of Managers of Peak NanoSystems, LLC. He is also a director of the Air Force Association.

 

Attributes, Skills and Qualifications

 

·   Extensive career as a senior military officer and member of the Joint Chiefs of Staff, having held leadership positions at the highest levels of the United States Air Force

 

·   Extensive experience and in-depth knowledge of issues related to global security and the intelligence community

 

·   Broad leadership experience and international experience, particularly in Europe

 

 

Vote Required

To be elected, a nominee must receive more votes cast “for” than votes cast “against” his or her election. Abstentions and broker non-votes will have no effect on this proposal. If a nominee is not re-elected, he or she will remain in office until a successor is elected or until his or her earlier resignation or removal.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE

“FOR” THE 12 NOMINEES FOR DIRECTOR LISTED ABOVE.

 

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 CORPORATE GOVERNANCE

 

 

 Overview

 

 

We are committed to maintaining high standards of corporate governance, consistent with our core values of sustainable performance, ethics and compliance. With strong oversight from the Board, our corporate governance regime is intended to promote the long-term success of our Company
to benefit our shareholders, customers and employees.

 

Our Company has adopted Principles of Corporate Governance and Standards of Business Conduct to
help guide and promote our good corporate governance and responsible business practices.

 

Our Principles of Corporate Governance outline the role and responsibilities of our Board and the high standards our directors maintain. They set forth additional independence requirements for our directors and provide guidelines for Board leadership and Board and Committee membership, among other items. The Board reviews these principles at least annually and considers opportunities for improvement and modification.

Our Standards of Business Conduct reflect and reinforce our commitment to integrity and ethics in all we do. They apply to our directors, officers and all employees.

Among other things, our Standards of Business Conduct:

 

·   require high ethical standards in all aspects of our business;

 

·   require strict adherence to all applicable laws and regulations;

 

·   reflect our commitment to maintaining a culture that values diversity and inclusion;

 

·   reinforce the need for avoiding actual or apparent conflicts of interest and require the responsible use of Company resources;

 

·   reinforce our commitment to being a responsible corporate citizen;

 

·   reflect our commitment to our work environment and the global communities where we live, work and serve;

 

·   require the consistent production of quality results; and

 

·   call upon all employees freely to seek guidance regarding business conduct and to raise any issues of concern (including on an anonymous basis).

We report amendments to provisions of our Standards of Business Conduct on our website. We disclose in a Form 8-K waivers of the provisions of our Standards of Business Conduct that apply to our directors or our executive officers (that is, Corporate Vice Presidents who are members of the Corporate Policy Council and our Chief Accounting Officer). There were no waivers from any provisions of our Standards of Business Conduct or amendments applicable to any director or executive officer in 2017.

 Role of the Board

 

The primary responsibility of our Board is to foster the long-term success of the Company, promoting the interests of our shareholders. Our directors exercise their business judgment in a manner they reasonably believe to be in the best interests of the Company and our shareholders and in a manner consistent with their fiduciary responsibilities. The responsibilities of the Board include, but are not limited to, the following:

 

·   oversee our long-term business strategies, operations and performance;

 

·   select the Chief Executive Officer and elect officers of the Company;

 

·   oversee our risk management activities;

 

·   oversee senior executive succession planning;

 

·   elect directors to fill vacant positions between Annual Meetings;

 

·   review and approve executive compensation;

 

·   review and approve significant corporate actions;

 

·   oversee and evaluate management and Board performance;

 

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 CORPORATE GOVERNANCE

 

 

 

·   oversee our ethics and compliance programs;

 

·   ensure effective corporate governance practices; and

 

·   provide advice to management.

Board’s Role in Risk Oversight

As noted above, the Board is responsible for overseeing our risk management activities, among other duties. Each of our Board committees assists the Board in this role.

 

·   The Audit Committee focuses on risks that could impact our financial performance. The Audit Committee periodically receives a report from the Chief Financial Officer and members of the Finance Department addressing our financial risk management processes, systems and internal controls, the nature of the material financial risks the Company faces and how the Company responds to and mitigates these risks. The Audit Committee periodically receives a report from our General Counsel on legal and other compliance risks and how the Company is addressing and mitigating those risks. The Audit Committee receives an annual report from our Chief Compliance Officer on the Company’s compliance program overall. The Audit Committee also receives quarterly reports from the Vice President, Global Corporate Responsibility on trends in ethics reporting.

 

·   The Compensation Committee reviews at least annually a risk assessment of the Company’s compensation programs and, together with its independent compensation consultant, evaluates the mix of at-risk compensation linked to stock appreciation.

 

·   The Policy Committee assists the Board in identifying and evaluating global security, political and budgetary issues and trends that could impact the Company’s business. The Policy Committee periodically receives a report from the Vice President, Global Corporate Responsibility on the Company’s ethics and corporate responsibility programs.

 

·   The Governance Committee regularly reviews the Company’s corporate governance policies and practices, and considers issues of succession and composition of the Board, recommending proposed changes to the full Board for approval.

The Board and its Committees provide oversight of the Company’s risk management processes, including the Enterprise Risk Management Council (ERMC). The ERMC is comprised of all members of the Corporate Policy Council, the Chief Accounting Officer, Chief Compliance Officer, Secretary, head of Internal Audit and Treasurer. The ERMC seeks to ensure that the Company has identified the most significant risks and implemented effective mitigation plans for each. The full Board has responsibility for oversight of cyber and other security risks, and receives periodic briefings from our Vice President and Chief Information Security Officer.

 Board Leadership Structure

 

Chairperson of the Board

Our Bylaws provide that our directors will designate a Chairperson of the Board from among its members. The Chairperson presides at all Board and shareholder meetings. The Chairperson interacts directly with all members of the Board and assists the Board to fulfill its responsibilities. The Principles of Corporate Governance provide that the Board believes it is in the best interests of the Company and the shareholders for the Board to have flexibility to determine the best director to serve as Chairperson of the Board at the time, based on consideration of all relevant factors. As discussed below, the Board believes that the appropriate leadership structure at this time is for Mr. Bush, our Chief Executive Officer, to serve as Chairman. Mr. Bush has served as Chairman since July 2011.

The Board believes that having the Chief Executive Officer serve as Chairman best positions the Company to be innovative, compete successfully and advance shareholder interests in today’s environment. The Board believes that Mr. Bush’s deep understanding of the Company’s business, day-to-day operations, growth opportunities, challenges and risk management practices gained through various leadership positions enables him to provide strong and effective leadership to the Board and to ensure that the Board is informed of important issues facing the Company. The Board consists entirely of independent directors other than Mr. Bush and it continues to exercise a strong, independent oversight function, with fully independent Board Committees and a strong Lead Independent Director with clearly articulated responsibilities. The Board evaluates the leadership structure of the Board on an ongoing basis to ensure that it continues to best meet the needs of the Company.

Lead Independent Director

If the Chairperson is not independent, the independent directors will designate annually from among them a Lead Independent Director. Following our 2017 Annual Meeting, the independent directors designated Mr. Felsinger as Lead Independent Director.

 

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 CORPORATE GOVERNANCE

 

 

Our Principles of Corporate Governance set forth specific duties and responsibilities of the Lead Independent Director, which include the following:

 

·   preside at meetings of the Board at which the Chairperson is not present, including executive sessions of the independent directors, and advise the Chairperson and CEO on decisions reached and suggestions made;

 

·   advise the Chairperson on and approve meeting agendas and information sent to the Board;

 

·   advise the Chairperson on and approve the schedule of Board meetings, assuring there is sufficient time for discussion of all agenda items;

 

·   provide the Chairperson with input as to the preparation of Board and committee meeting agendas, taking into account the requests of the other Board and committee members;

 

·   interview, along with the Chairperson and the Chairperson of the Governance Committee, Board candidates and make recommendations to the Governance Committee and the Board;

 

·   call meetings of the independent directors;

 

·   serve as liaison between the Chairperson and the independent directors; and

 

·   if requested by major shareholders, ensure that he or she is available for consultation and direct communication.

 Committees of the Board of Directors

 

The Board has four standing committees: the Audit Committee, the Compensation Committee, the Governance Committee and the Policy Committee. The membership of these committees is typically determined at the organizational meeting of the Board held in conjunction with the annual meeting. All the committees are composed entirely of independent directors. The primary responsibilities of each of the committees are summarized below, together with a table listing the membership and chairperson of each committee. The charters for each standing committee can be found on the Investor Relations section of our website (www.northropgrumman.com).

 

Audit Committee

 

Roles and Responsibilities

 

 

Committee Members

 

Assist the Board in overseeing (1) the integrity of the Company’s financial statements and the Company’s accounting and financial reporting processes; (2) the Company’s overall compliance with legal and regulatory requirements; (3) financial risk assessment and management; (4) the qualifications, performance and independence of the Company’s independent auditor; (5) the performance of the Company’s internal audit function; and (6) the Company’s system of disclosure controls and procedures and internal control over financial reporting, by:

 

· appointing, retaining, overseeing, evaluating and terminating, if necessary, the independent auditor

 

· reviewing and pre-approving audit and permitted non-audit services and related fees for the independent auditor

 

· reviewing and discussing the Company’s Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q

 

· reviewing and discussing management’s assessment of, and report on, the effectiveness of the Company’s internal control over financial reporting at least annually and the independent auditor’s related report

 

· reviewing with the General Counsel, at least annually, the status of significant pending litigation and various other significant legal, compliance or regulatory matters

 

· reviewing with the Chief Compliance Officer, at least annually, the Company’s compliance program

 

· discussing guidelines and policies regarding risk assessment and risk management

 

· reviewing any significant issues raised by the internal audit function and, as appropriate, management’s actions for remediation

 

· establishing and periodically reviewing and discussing with management the Company’s procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters

 

William H. Hernandez (chair)

Marianne C. Brown

Victor H. Fazio

Ann M. Fudge

Madeleine A. Kleiner

James S. Turley

Mark A. Welsh III

 

Number of meetings in 2017: 9

 

Independence, Financial Literacy and Audit Committee Financial Experts

 

All members are independent and financially literate

 

Ms. Kleiner and Messrs. Hernandez and Turley each qualifies as an Audit Committee Financial Expert

 

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 CORPORATE GOVERNANCE

 

 

 

Compensation Committee

 

Roles and Responsibilities

 

 

Committee Members

 

Assist the Board in overseeing the Company’s compensation policies and practices by:

 

· approving the compensation for elected officers (other than the Chief Executive Officer, whose compensation is recommended by the Committee and approved by all the independent directors)

 

· establishing stock ownership guidelines and reviewing ownership levels on an annual basis

 

· administering incentive and equity compensation plans and approving payments or grants under these plans for elected officers (other than the Chief Executive Officer)

 

· recommending for approval compensation for the non-employee directors, after consultation with the independent compensation consultant

 

· producing an annual report on executive compensation for inclusion in the proxy statement

 

· providing support to the Board in carrying out its overall responsibilities related to executive compensation

 

Karl J. Krapek (chair)

Donald E. Felsinger

Bruce S. Gordon

Gary Roughead

Thomas M. Schoewe

 

Number of meetings in 2017: 7

 

Independence

 

All members are independent

 

Governance Committee

 

Roles and Responsibilities

 

 

Committee Members

 

Assist the Board in overseeing the Company’s corporate governance practices by:

 

· regularly reviewing the Company’s corporate governance policies and practices, including the Principles of Corporate Governance and the Company’s Bylaws

 

· regularly reviewing and considering corporate governance developments, emerging trends and best practices and recommending changes to the Board

 

· reviewing and making recommendations with respect to shareholder proposals and the results of shareholder proposals, if any, voted on at a shareholders meeting

 

· regularly reviewing and making recommendations to the Board regarding the composition and size of the Board and the criteria for Board membership, which should include, among other things, diversity, experience and integrity

 

· providing effective board succession planning, identifying and recommending to the Board qualified potential candidates to serve on the Board and its committees and, if applicable, meeting with proxy access nominees nominated through the Company’s proxy access bylaw provision

 

· reviewing and determining whether a director’s service on another board or elsewhere is likely to interfere with the director’s duties and responsibilities as a member of the Board

 

· reviewing and recommending board, director and committee evaluation processes and coordinating the process for the Board to evaluate its performance

 

Madeleine A. Kleiner (chair)

Donald E. Felsinger

William H. Hernandez

Karl J. Krapek

Gary Roughead

James S. Turley

 

Number of meetings in 2017: 5

 

Independence

 

All members are independent

 

Policy Committee

 

Roles and Responsibilities

 

 

Committee Members

 

Assist the Board in overseeing policy, government relations and corporate responsibility by:

 

· identifying and evaluating global security, budgetary and other issues and trends that could impact the Company’s business activities and performance

 

· reviewing and providing oversight over the Company’s ethics and corporate responsibility policies and programs

 

· reviewing the Company’s public relations and advertising strategy

 

· reviewing and monitoring the Company’s government relations strategy and political action committee

 

· reviewing the Company’s community relations activities

 

· reviewing and providing oversight of the Company’s environmental sustainability program

 

Bruce S. Gordon (chair)

Marianne C. Brown

Victor H. Fazio

Ann M. Fudge

Thomas M. Schoewe

Mark A. Welsh III

 

Number of meetings in 2017: 4

 

Independence

 

All members are independent

 

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 CORPORATE GOVERNANCE

 

 

 Board Meetings and Executive Sessions

 

The Board meets no fewer than nine times each year (including via telephonic meetings). Special meetings of the Board may be called from time to time as appropriate. On an annual basis, the Board holds an extended meeting to review our long-term strategy.

The Board holds its meetings at Company locations other than our corporate headquarters on a regular basis to provide the directors with a first-hand view of different elements of our business and an opportunity to interact with local management.

The Board meets in executive session (with the directors only and then with the independent directors only) following each in-person Board meeting and on other occasions as needed. The non-executive Chairperson or the Lead Independent Director presides over the executive sessions of the independent directors. The Audit Committee meets in executive session at each in-person Audit Committee meeting, and regularly requests separate executive sessions with representatives of our independent auditor and our senior management, including our Chief Financial Officer, General Counsel and our Vice President, Internal Audit. The Compensation Committee also meets in executive session from time to time and regularly receives a report from the Compensation Committee’s independent compensation consultant. The Governance and Policy Committees also meet in executive session as they deem necessary.

 Meeting Attendance

 

During 2017, the Board held 14 meetings. Each incumbent director serving in 2017 attended 75% or more of the total number of Board and committee meetings he or she was eligible to attend. Board members are expected to attend the Annual Meeting, except where the failure to attend is due to unavoidable circumstances. All of our then-serving directors attended the 2017 Annual Meeting.

 Director Independence

 

The Board has established an objective that at least 75% of our directors be independent directors. The Board and the Governance Committee annually review the relevant relationships or arrangements between the Company and our directors or parties related to the directors in determining whether such directors are independent. No director is considered independent unless the Board has determined that the director meets the independence requirements under applicable New York Stock Exchange (NYSE) and SEC rules and under our categorical independence standards, which are described in our Principles of Corporate Governance. For a director to be considered independent, the Board must determine that a director has no material relationship with the Company other than as a director.

Our Principles of Corporate Governance provide that a director may be found not to qualify as an independent director if the director:

 

·   has within the prior three years been a director, executive officer or trustee of a charitable organization that received annual contributions from the Company exceeding the greater of $1 million or 2% of the charitable organization’s annual gross revenues, where the gifts were not normal matching charitable gifts, did not go through normal corporate charitable donation approval processes or were made “on behalf of” a director;

 

·   has, or has an immediate family member who has, within the prior three years been employed by, a partner in or otherwise affiliated with any law firm or investment bank in which the director’s or the immediate family member’s compensation was contingent on the services performed for the Company or in which the director or the immediate family member personally performed services for the Company and the annual fees paid by the Company during the preceding fiscal year exceeded the greater of $1 million or 2% of the gross annual revenues of such firm; or

 

·   has, or has an immediate family member who has, within the prior three years owned, either directly or indirectly as a partner, shareholder or officer of another company, more than 5% of the equity of an organization that has a material business relationship with (including significant purchasers of goods or services), or more than 5% ownership in, the Company.

 

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Independence Determination

In connection with their annual independence review, the Board and Governance Committee considered the following relationships with organizations to which we have made payments in the usual course of our business in 2017.

 

·   Mr. Fazio’s service as a member of the board of directors of the Center for Strategic and Budgetary Assessments;

 

·   Mr. Felsinger’s service as a member of the board of directors of Archer-Daniels-Midland;

 

·   Mr. Gordon’s service as a member of the board of directors of CBS Corporation;

 

·   Mr. Hernandez’s service as a member of the board of directors of Black Box Corporation;

 

·   Admiral Roughead’s service as a member of the board of directors of the Center For a New American Security and a member of the board of managers of Johns Hopkins University Applied Physics Lab; and

 

·   Mr. Turley’s service as a member of the board of directors of Citigroup.

The Board of Directors considered that Mr. Fazio, Ms. Fudge, Mr. Gordon, Ms. Kleiner, Mr. Krapek, Mr. Turley and General Welsh serve as members of the boards of, or are otherwise affiliated with, organizations to which the Company and/or the Northrop Grumman Foundation (Foundation) made contributions during 2017 in the usual course of our charitable contributions program, as well as in connection with our matching gifts program (which limits the contributions to $10,000 per year per director). The amounts paid were below the applicable thresholds under NYSE rules and our Principles of Corporate Governance. In addition, the Board considered that Mr. Fazio’s daughter is employed by us in a non-executive position. Her compensation is below the threshold required for disclosure by the SEC, and the Board determined that her employment does not interfere with Mr. Fazio’s independence.

Following its review and the recommendation of the Governance Committee, the Board affirmatively determined that all of the directors, except Mr. Bush, are independent. The independent directors constitute approximately 92% of the members of our Board. The Board previously determined that General Richard B. Myers, who served as a director until his retirement from the Board effective the date of the 2017 Annual Meeting, was independent during the time he was a director.

 Director Election Process

 

Our Bylaws and Certificate of Incorporation provide for the annual election of directors. Each director will hold office until the next annual meeting of shareholders or until his or her earlier resignation or removal. Generally, in order to be elected, a director must receive more votes cast “for” than “against” his or her election, unless one or more shareholders provide notice of an intention to nominate one or more candidates to compete with the Board’s nominees for election in accordance with the procedures set forth in the Company’s corporate governance documents.

 Board Composition and Director Nominations

 

The Governance Committee actively considers the composition of the Board to ensure it is well positioned to serve the best interests of the Company and our shareholders. The Governance Committee regularly assesses what skills and experiences can best contribute to the effective operation of the Board, particularly in light of potential retirements and the evolving needs of the Company. The Governance Committee identifies director candidates from a wide range of sources and may employ a third-party search firm to assist in the process.

The Governance Committee evaluates potential director candidates on the basis of the candidate’s background, qualifications and experience. The Governance Committee carefully considers whether each potential candidate would be able to fulfill his or her duties to the Company consistent with Delaware law and the Company’s governing documents, including the Principles of Corporate Governance. The Committee recommends to the full Board nominees for election.

Shareholders may recommend director candidates for consideration by the Governance Committee pursuant to our Principles of Corporate Governance. The Governance Committee considers such director candidates recommended by shareholders similarly to other potential director candidates brought to the attention of the Governance Committee. Shareholder recommendations for director candidates under our Principles of Corporate Governance must be addressed to the Governance Committee in care of the Corporate Secretary. In addition, and as discussed immediately below, shareholders may also directly nominate director candidates in accordance with our Bylaws.

 

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The Board carefully considered and adopted a strong and balanced proxy access framework

For more than a year, the Board carefully considered the issue of proxy access. The Board and management engaged extensively with shareholders and monitored developments and best practices regarding proxy access. Management solicited and received input from shareholders, our customers and other stakeholders. The Board amended our Bylaws to provide our shareholders the right to proxy access, reflecting this extensive consideration and input.

Under the Company’s proxy access bylaws, a shareholder, or a group of up to 20 shareholders, that has maintained continuous ownership of 3% or more of the Company’s outstanding common stock for at least three years may include in the Company’s proxy materials director nominees constituting up to the greater of two nominees or nominees constituting 20% of the number of directors in office. Director nominees may receive compensation from third parties for their candidacy, up to the total annual compensation paid to directors of the Company, as well as reimbursement for reasonable expenses, provided there is full disclosure of such compensation. Under the Company’s proxy access bylaw provisions, directors are treated similarly, whether nominated through proxy access or otherwise, and held to the same high fiduciary standards to serve all shareholders.

The Company’s Bylaws provide our shareholders with broad and meaningful access to the Company’s proxy materials while enhancing transparency, protecting the interests of all shareholders and ensuring good governance. The terms of the Company’s proxy access bylaw provisions are also broadly consistent with the terms of proxy access bylaws adopted by other Fortune 500 companies, reflecting best practices.

 Director Qualifications

 

The Governance Committee is responsible for establishing the criteria for Board membership. In nominating directors, the Governance Committee bears in mind that the foremost responsibility of a director is to represent the interests of our shareholders as a whole. The activities and associations of candidates are reviewed for any legal impediment, conflict of interest or other consideration that might prevent or interfere with service on our Board.

In evaluating candidates, the Governance Committee considers:

 

·   the personal integrity and the professional reputation of the individual;

 

·   the education, professional background and particular skills and experience most beneficial to service on our Board;

 

·   how the nominee brings diversity, experience and skills valuable to the Company and Board at the time; and

 

·   whether a director candidate is willing to submit to and obtain a background check necessary for obtaining and retaining a top secret security clearance.

In evaluating director candidates, the Governance Committee aims to foster diversity of thought on our Board. The Governance Committee seeks to achieve diversity, including in race and gender, as well as in perspective, professional experience, education, skill and other qualities that contribute to our Board and the long-term interests of our Company and shareholders.

 Director Orientation and Continuing Education

 

All new directors to the Board receive in-person orientation and training that is individually tailored, taking into account the director’s experience, background, education and committee assignments. The orientation program is led by members of senior management and covers a review of our strategy and operating plans, financial statements, corporate governance and key policies and practices, as well as the roles and responsibilities of our directors.

All directors receive regular in-person training on Company policies and procedures. Members of senior management regularly review with the Board the operating plan for each of our business sectors and the Company as a whole. The Board also conducts periodic site visits to our facilities as part of its regularly scheduled Board meetings. These visits allow directors to interact with a broader group of our executives and employees and gain firsthand insights into our operations.

Directors may also attend outside director and other continuing education programs to assist them in staying current on developments in corporate governance, our industry, the global environment and issues critical to the operation of public company boards.

 

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 Board Membership and External Relationships

 

Directors are required to ensure that their other commitments, including for example, other board memberships, employment, partnerships and consulting arrangements, do not interfere with their duties and responsibilities as members of the Board. Directors must provide notice to the General Counsel prior to accepting an invitation to serve on the board of any other organization, and the General Counsel will advise the Chairperson of the Governance Committee (or the Chairperson of the Board, if notice is from the Chairperson of the Governance Committee). A director should not accept service on such other board until being advised by the Chairperson of the Governance Committee (or Chairperson of the Board, as appropriate) that such engagement will not unacceptably create conflicts of interest or regulatory issues, conflict with Company policies or otherwise interfere with the director’s duties and responsibilities as a member of the Board. Directors are also required promptly to inform the General Counsel if an actual or potential conflict of interest arises, or they are concerned that a conflict may arise or circumstances could otherwise interfere with their duties and responsibilities as a director. Directors should seek to avoid even an appearance of a conflict of interest.

Directors may not serve on more than three other boards of publicly traded companies in addition to our Board without the written approval of the Chairperson of the Governance Committee (or Chairperson of the Board, as appropriate). A director who is a full-time employee of our Company may not serve on the board of more than two other public companies unless approved by the Board. When a director’s principal occupation or business association changes substantially during his or her tenure as a director, the Board expects the director to tender his or her resignation for consideration by the Governance Committee, which subsequently will recommend to the Board what action to take.

We have a retirement policy whereby a director will retire at the annual meeting following his or her 75th birthday, unless the Board determines, based on special circumstances, that it is in the Company’s best interest to request that the director serve beyond such date.

 Effect of Failure to Receive the Required Vote or Obtain and Retain Security Clearance

 

Each director is required to tender a resignation that will be effective upon (i) the failure to receive the required vote at any future meeting at which such director faces re-election, the failure to obtain top secret security clearance within 12 months of election or appointment to the Board or the failure to retain a top secret security clearance once obtained and (ii) the Board’s acceptance of such resignation. If an incumbent director fails to receive the required vote for re-election or fails to obtain and retain a top secret security clearance, the Governance Committee will consider whether the Board should accept the director’s resignation and will submit a recommendation for prompt consideration by the Board. The Board will decide whether to accept or reject a resignation within 90 days, unless the Board determines that compelling circumstances require additional time. The Governance Committee and the Board may consider any factor they deem relevant in deciding whether to accept a resignation, including, without limitation, any harm to our Company that may result from accepting the resignation, and the underlying reasons for the action at issue.

 Board and Committee Self-Evaluation

 

The Board and each Committee conduct annually a thorough self-assessment process. The self-assessment of the Board is overseen by the Governance Committee. As part of this assessment, the Lead Independent Director and Chairperson of the Governance Committee facilitate a broad discussion of Board performance, held in executive session. Among other topics, the Board considers:

 

·   the Board’s effectiveness in evaluating and monitoring the Company’s business plan, long-term strategy and risks;

 

·   whether strategic and critical issues are being addressed by the Board in a timely manner;

 

·   whether the Board’s expectations and concerns are openly communicated to and discussed with the Chief Executive Officer;

 

·   whether there is adequate contact between the Board and members of senior management;

 

·   whether the directors collectively operate effectively as a Board;

 

·   whether the individual directors have the appropriate mix of attributes and skills to fulfill their duties as directors of the Company;

 

·   whether there are adequate opportunities to raise questions and comments on issues, both inside and outside of Board meetings;

 

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·   whether the Board has focused adequately on succession planning; and

 

·   whether the Board is adequately responsive to shareholder communication.

Following this review, the Board discusses the results and identifies opportunities for improvement, including any necessary steps to implement such improvements.

Also as part of the annual self-assessment process, each director completes an individual director evaluation for each of the other directors. These assessments include, among other topics, each director’s:

 

·   understanding of the Company’s overall business and risk profile and its significant financial opportunities and plans;

 

·   engagement during meetings and other board functions;

 

·   analysis of benefits and risks of courses of action considered by the Board; and

 

·   appropriate respect for the views of other Board members.

The Lead Independent Director or the Chairperson of the Governance Committee meets with each director individually to discuss the results of his or her assessment, including comments provided by other directors. The Lead Independent Director or the Chairperson of the Governance Committee reports generally on the overall results of these discussions to the Board in executive session. These evaluations assist the Governance Committee with its recommendation for directors to be renominated for election to the Board of Directors.

In addition, each of the Committees conducts an annual self-assessment. During an executive session led by the Committee chairperson, the Committee discusses, among other topics: whether the quality of participation and discussion at the Committee meetings is effective in facilitating the Committee’s obligations under its charter; the opportunity to engage in strategic discussion; and whether the Committee is covering the right topics in the right amount of detail. Following this discussion, the Committee develops and implements a list of action items, as appropriate.

 Succession Planning

 

The Board believes that providing for continuity of leadership is critical to the success of our Company. Therefore, processes are in place:

 

·   to evaluate the Chief Executive Officer annually based on a specific set of performance objectives;

 

·   for the Chief Executive Officer annually to provide an assessment of persons considered potential successors to various senior management positions and discuss the results of these reviews with the Board; and

 

·   to support continuity of top leadership and Chief Executive Officer succession, including through annual reports to the Board.

 Departure and Election of Directors

 

General Richard B. Myers, a director who served during 2017, did not stand for re-election at the 2017 Annual Meeting and retired from the Board effective the date of the 2017 Annual Meeting.

In accordance with the retirement policy described above, Mr. Fazio, a director who served during 2017, will not stand for re-election at the 2018 Annual Meeting as he will have attained his 75th birthday prior to the Annual Meeting. Upon Mr. Fazio’s retirement, the Board intends to reduce the number of members on the Board from 13 to 12 members.

 Communications with the Board of Directors

 

Any interested person may communicate with any of our directors, our Board as a group, our non-employee directors as a group or our Lead Independent Director through the Corporate Secretary by writing to the following address: Office of the Corporate Secretary, Northrop Grumman Corporation, 2980 Fairview Park Drive, Falls Church, Virginia 22042. The Corporate Secretary will forward correspondence to the director or directors to whom it is addressed, except for job inquiries, surveys, business solicitations or advertisements and other inappropriate material. The Corporate Secretary may forward certain correspondence elsewhere within our Company for review and possible response.

 

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Interested persons may also report any concerns relating to accounting matters, internal accounting controls or auditing matters to non-management directors (including anonymously) by writing directly to the Chairperson of the Audit Committee, Northrop Grumman Board of Directors c/o Corporate Ethics Office, 2980 Fairview Park Drive, Falls Church, Virginia 22042.

 Corporate Responsibility and Sustainability

 

Corporate responsibility and sustainability are critical to our business and long-term value creation for our shareholders, customers and employees. Our strong culture — founded in ethics, integrity, diversity and inclusion, and focused on performance, accountability, effective governance and responsible citizenship — enables our success. Strong environmental, social and governance (ESG) programs and practices help us attract and maintain the best talent, perform for our customers and create value for our shareholders.

The Policy Committee of our Board provides leadership and oversight of our ESG practices. The Committee provides oversight of our policies and programs related to both corporate responsibility and sustainability, and regularly reviews our community relations activities, among other responsibilities. We engage with a variety of stakeholders and regularly obtain feedback on our ESG performance.

In 2017, we published our ninth annual corporate responsibility report (CRR). Using the GRI G4 Sustainability Reporting Guidelines, we continued to report to our stakeholders on our progress in meeting various environmental, social and governance performance indicators. You may view a copy of our annual CRR at crreport.northropgrumman.com. For the seventh consecutive year, we incorporated non-financial sustainability performance metrics into our annual incentive compensation program. See page 41 in the Compensation Discussion and Analysis section.

We are proud that our corporate responsibility and sustainability programs received various notable recognitions in 2017. They include:

 

·   earning a leadership score of A- in CDP’s 2017 climate change program for the sixth consecutive year;

 

·   earning an A rating from MSCI for environmental, social and governance management and performance;

 

·   being named to the Dow Jones Sustainability North America Index for the second consecutive year; and

 

·   being named one of DiversityInc’s Top 50 Companies for Diversity for the eighth year in a row.

 

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 COMPENSATION OF DIRECTORS

 

 

The Compensation Committee, with the assistance of its independent compensation consultant, is responsible for reviewing and recommending for approval the compensation of the non-employee directors. At the request of the Compensation Committee, the independent compensation consultant prepares annually a comprehensive benchmarking of our non-employee director compensation program against the compensation programs offered by our Target Industry Peer Group (the same peer group against which executive compensation is compared). Consistent with this benchmarking, the overarching approach for non-employee director compensation is to target the 50th percentile of the Target Industry Peer Group.

In May 2017, the Compensation Committee recommended to the Board, and the Board approved, the current non-employee director fee structure, effective May 17, 2017. The table below lists the annual fees payable to our non-employee directors from January 1, 2017 to May 16, 2017 under the prior fee structure and the annual fees payable under the current fee structure effective May 17, 2017.

 

  Compensation Element

 

  

 

Amount ($)

(1/1/17 - 5/16/17)

 

    

 

Amount ($)  

(5/17/17 - 12/31/17)  

 

 

Annual Cash Retainer

 

    

 

 

 

 

122,500

 

 

 

      

 

 

 

 

122,500

 

 

 

 

Lead Independent Director Retainer

 

    

 

 

 

 

35,000

 

 

 

      

 

 

 

 

35,000

 

 

 

 

Audit Committee Retainer

 

    

 

 

 

 

10,000

 

 

 

      

 

 

 

 

10,000

 

 

 

 

Audit Committee Chair Retainer

 

    

 

 

 

 

20,000

 

 

 

      

 

 

 

 

20,000

 

 

 

 

Compensation Committee Chair Retainer

 

    

 

 

 

 

20,000

 

 

 

      

 

 

 

 

20,000

 

 

 

 

Governance Committee Chair Retainer

 

    

 

 

 

 

15,000

 

 

 

      

 

 

 

 

15,000

 

 

 

 

Policy Committee Chair Retainer

 

    

 

 

 

 

7,500

 

 

 

      

 

 

 

 

7,500

 

 

 

 

Annual Equity Grant (1)

 

    

 

 

 

 

145,000

 

 

 

      

 

 

 

 

150,000

 

 

 

 

  (1) The annual equity grant is deferred into a stock unit account pursuant to the 2011 Long-Term Incentive Stock Plan (2011 Plan) as described below. The Northrop Grumman Equity Grant Program for Non-Employee Directors (Director Program) sets forth the terms and conditions of the equity awards granted to non-employee directors under the 2011 Plan.  

Retainer fees are paid on a quarterly basis at the end of each quarter. To encourage directors to have a direct and material investment in shares of our common stock, non-employee directors are awarded an annual equity grant of $150,000 in the form of deferred stock units (Automatic Stock Units).

The Director Program was amended and restated effective January 1, 2016 (the Amended Director Program). Directors received an annual equity grant of Automatic Stock Units on May 18, 2016, which vested on May 18, 2017, and an annual equity grant of Automatic Stock Units on May 17, 2017, which will vest on the one year anniversary of the grant date. Under the Amended Director Program, directors may elect to have all or any portion of their Automatic Stock Units paid on (A) the earlier of (i) the beginning of a specified calendar year after the vesting date or (ii) their separation from service as a member of the Board, or (B) the vesting date. Directors may elect to defer to a later year all or a portion of their remaining cash retainer or committee retainer fees into a stock unit account as Elective Stock Units or in alternative investment options. Elective Stock Units are awarded on a calendar quarterly basis. Directors may elect to have all or a portion of their Elective Stock Units paid on the earlier of (i) the beginning of a specified calendar year or (ii) their separation from service as a member of the Board. Stock units awarded under the Amended Director Program will be paid out in an equivalent number of shares of our common stock. Deferral elections are made prior to the beginning of the year for which the retainer fees will be paid. Directors are credited with dividend equivalents in connection with the accumulated stock units until the shares of common stock related to such stock units are issued.

Non-employee directors are eligible to participate in our Matching Gifts Program for Education. Under this program, the Northrop Grumman Foundation matches director contributions, up to $10,000 per year per director, to eligible educational programs in accordance with the program.

 Stock Ownership Requirements and Anti-Hedging and Pledging Policy

 

Non-employee directors are required to own common stock of the Company in an amount equal to five times the annual cash retainer, with such ownership to be achieved within five years of the director’s election to the Board. Deferred stock units and Company stock owned outright by the director count towards this requirement.

Company policy prohibits members of the Board of Directors from pledging or engaging in hedging transactions with respect to any of their Company stock, continuing to align the interests of our Board of Directors with those of our shareholders. None of the shares of Company common stock held by our directors are pledged or subject to any hedging transaction.

 

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 COMPENSATION OF DIRECTORS

 

 

 2017 Director Compensation

 

The table below provides information on the compensation of our non-employee directors for the year ended December 31, 2017.

 

 

  Name

 

  

 

Fees Earned or
Paid in Cash (1)
($)

 

    

 

Stock

Awards (2)
($)

 

    

 

All Other
Compensation (3)
($)

 

    

 

Total  

($)  

 

 

Marianne C. Brown

 

    

 

 

 

 

132,500

 

 

 

      

 

 

 

 

150,000

 

 

 

      

 

 

 

 

177

 

 

 

      

 

 

 

 

282,677  

 

 

 

 

Victor H. Fazio

 

    

 

 

 

 

132,500

 

 

 

      

 

 

 

 

150,000

 

 

 

      

 

 

 

 

25,690

 

 

 

      

 

 

 

 

308,190  

 

 

 

 

Donald E. Felsinger

 

    

 

 

 

 

157,500

 

 

 

      

 

 

 

 

150,000

 

 

 

      

 

 

 

 

17,307

 

 

 

      

 

 

 

 

324,807  

 

 

 

 

Ann M. Fudge

 

    

 

 

 

 

132,500

 

 

 

      

 

 

 

 

150,000

 

 

 

      

 

 

 

 

8,073

 

 

 

      

 

 

 

 

290,573  

 

 

 

 

Bruce S. Gordon

 

    

 

 

 

 

130,000

 

 

 

      

 

 

 

 

150,000

 

 

 

      

 

 

 

 

17,086

 

 

 

      

 

 

 

 

297,086  

 

 

 

 

William H. Hernandez

 

    

 

 

 

 

152,500

 

 

 

      

 

 

 

 

150,000

 

 

 

      

 

 

 

 

447

 

 

 

      

 

 

 

 

302,947  

 

 

 

 

Madeleine A. Kleiner

 

    

 

 

 

 

147,500

 

 

 

      

 

 

 

 

150,000

 

 

 

      

 

 

 

 

17,022

 

 

 

      

 

 

 

 

314,522  

 

 

 

 

Karl J. Krapek

 

    

 

 

 

 

142,500

 

 

 

      

 

 

 

 

150,000

 

 

 

      

 

 

 

 

19,287

 

 

 

      

 

 

 

 

311,787  

 

 

 

 

Richard B. Myers (4)

 

    

 

 

 

 

30,625

 

 

 

      

 

 

 

 

 

 

 

      

 

 

 

 

2,517

 

 

 

      

 

 

 

 

33,142  

 

 

 

 

Gary Roughead

 

    

 

 

 

 

122,500

 

 

 

      

 

 

 

 

150,000

 

 

 

      

 

 

 

 

1,500

 

 

 

      

 

 

 

 

274,000  

 

 

 

 

Thomas M. Schoewe

 

    

 

 

 

 

122,500

 

 

 

      

 

 

 

 

150,000

 

 

 

      

 

 

 

 

2,027

 

 

 

      

 

 

 

 

274,527  

 

 

 

 

James S. Turley

 

    

 

 

 

 

132,500

 

 

 

      

 

 

 

 

150,000

 

 

 

      

 

 

 

 

155

 

 

 

      

 

 

 

 

282,655  

 

 

 

 

Mark A. Welsh III

 

    

 

 

 

 

132,500

 

 

 

      

 

 

 

 

150,000

 

 

 

      

 

 

 

 

13

 

 

 

      

 

 

 

 

282,513  

 

 

 

 

(1) Amounts reflect the annual cash retainer paid to each director, including any applicable annual committee and committee chair retainers and any applicable Lead Independent Director or Chairperson retainer. As described above, a director may elect to defer all or a portion of his or her annual cash retainer into a deferred stock unit account. Amounts deferred as Elective Stock Units or deferred into alternative investment options are reflected in this column.

 

(2) Amounts represent the target value of Automatic Stock Units awarded to each of our non-employee directors in 2017 under the 2011 Plan pursuant to the Amended Director Program. The amount reported for each director reflects the aggregate fair value of the Automatic Stock Units on the grant date, as determined under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, Stock Compensation, excluding any assumed forfeitures. The grant date fair value assumes the value of dividend equivalents accrued directly on the awarded units. The aggregate number of Automatic Stock Units and Elective Stock Units held by each director as of December 31, 2017 is provided in the Deferred Stock Units table below.

 

(3) Amounts reflect (i) the estimated dollar value of additional stock units credited to each non-employee director as a result of dividend equivalents earned, directly or indirectly, on reinvested dividend equivalents as such amounts are not assumed in the grant date fair value of the Automatic Stock Units shown in the “Stock Awards” column, and (ii) matching contributions made through our Matching Gifts Program for Education discussed above as follows: Mr. Fazio, $10,000; Ms. Fudge, $8,000; Mr. Gordon, $10,000; Ms. Kleiner, $10,000; and Mr. Krapek, $10,000.

 

(4) General Myers did not stand for reelection at the 2017 Annual Meeting.

 

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 COMPENSATION OF DIRECTORS

 

 

Deferred Stock Units

As of December 31, 2017, the non-employee directors had the following aggregate number of deferred stock units accumulated in their deferral accounts for all years of service as a director, including additional stock units credited as a result of dividend equivalents earned on the stock units.

 

 

  Name

 

  

 

    Automatic Stock    

Units

 

  

 

    Elective Stock    

Units

 

  

 

            Total             

 

 

Marianne C. Brown

 

    

 

 

 

 

2,250

 

 

 

    

 

 

 

 

1,121

 

 

 

    

 

 

 

 

3,371

 

 

 

 

Victor H. Fazio

 

    

 

 

 

 

12,694

 

 

 

    

 

 

 

 

7,611

 

 

 

    

 

 

 

 

20,305

 

 

 

 

Donald E. Felsinger

 

    

 

 

 

 

19,677

 

 

 

    

 

 

 

 

14,663

 

 

 

    

 

 

 

 

34,340

 

 

 

 

Ann M. Fudge

 

    

 

 

 

 

1,312

 

 

 

    

 

 

 

 

474

 

 

 

    

 

 

 

 

1,786

 

 

 

 

Bruce S. Gordon

 

    

 

 

 

 

16,325

 

 

 

    

 

 

 

 

 

 

 

    

 

 

 

 

16,325

 

 

 

 

William H. Hernandez

 

    

 

 

 

 

3,851

 

 

 

    

 

 

 

 

 

 

 

    

 

 

 

 

3,851

 

 

 

 

Madeleine A. Kleiner

 

    

 

 

 

 

15,339

 

 

 

    

 

 

 

 

 

 

 

    

 

 

 

 

15,339

 

 

 

 

Karl J. Krapek

 

    

 

 

 

 

16,368

 

 

 

    

 

 

 

 

5,840

 

 

 

    

 

 

 

 

22,208

 

 

 

 

Richard B. Myers (1)

 

    

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

Gary Roughead

 

    

 

 

 

 

7,045

 

 

 

    

 

 

 

 

 

 

 

    

 

 

 

 

7,045

 

 

 

 

Thomas M. Schoewe

 

    

 

 

 

 

8,241

 

 

 

    

 

 

 

 

 

 

 

    

 

 

 

 

8,241

 

 

 

 

James S. Turley

 

    

 

 

 

 

2,319

 

 

 

    

 

 

 

 

 

 

 

    

 

 

 

 

2,319

 

 

 

 

Mark A. Welsh III

 

    

 

 

 

 

889

 

 

 

    

 

 

 

 

 

 

 

    

 

 

 

 

889

 

 

 

 

(1) General Myers did not stand for reelection at the 2017 Annual Meeting. All stock units were paid out to General Myers in the form of common stock after his retirement from the Board in May 2017.

Director Equity Plan

Under the Northrop Grumman Non-Employee Directors Equity Participation Plan (Director Equity Plan), non-employee directors had an amount equal to 50% of their annual retainer credited to an equity participation account and converted into stock units based on the then fair market value (as defined in the Director Equity Plan) of our common stock. No new participants have been added to the Director Equity Plan since May 31, 2005, and no new annual accruals have been credited to the then-existing participants in the Director Equity Plan since that time. However, directors that served on the Board in and before 2005 continue to be credited with dividend equivalents on the cumulative stock units held in their equity participation accounts until the director terminates service on the Board. Mr. Fazio is the only director that earns dividend equivalents under the Director Equity Plan. No other current director participates in the Director Equity Plan.

Generally, if a participating non-employee director terminates service on the Board after completion of at least three consecutive years of service or retires from the Board as a result of a total disability or a debilitating illness as defined in the Director Equity Plan, the participant will be entitled to receive the full balance of the participant’s equity participant account in annual installments. Upon a change in control of the Company, as defined in the Director Equity Plan, the participant will immediately be entitled to receive the full balance of the equity participation account under the Director Equity Plan regardless of the number of years of consecutive service, although payment of his or her benefits will not commence until the termination of his or her service.

 

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 TRANSACTIONS WITH RELATED PERSONS AND CONTROL PERSONS

 

 

 Related Person Transactions

 

The Company has a written policy approved by the Board, for the review, approval and ratification of transactions between our Company and our directors, executive officers and other related persons (Related Person Transactions Policy). A copy of the policy is available on the Investor Relations section of our website (www.northropgrumman.com). The policy provides for all related person transactions to be reviewed in advance and approved or ratified, as applicable, by the Board of Directors, the Governance Committee or the Chairperson of the Governance Committee. A related person transaction may be approved if, after reviewing the relevant facts and circumstances, the reviewing party concludes that approving the related person transaction is in the best interests of the Company and its shareholders.

The policy defines a related person transaction as any transaction in which the Company was, is or will be a participant, where the amount involved exceeds $120,000, and in which a related person had, has or is expected to have a direct or indirect material interest. A “related person” includes:

 

·   any of our directors or executive officers;

 

·   any person who is known to be the beneficial owner of more than 5% of our common stock;

 

·   an immediate family member of any such persons; or

 

·   any firm, corporation, or other entity controlled by any such persons.

The Corporate Secretary may determine that, based on facts and circumstances, a transaction in an amount less than $120,000 should nonetheless be deemed a related person transaction. If this occurs, the transaction would be submitted for review and approval or ratification in accordance with the policy. Under exceptional circumstances, if a related person transaction has not been approved in advance, the Governance Committee will recommend to the Board of Directors such action as the Governance Committee deems appropriate, including ratification, amendment or termination of the transaction.

The policy requires each director and executive officer to complete an annual questionnaire to identify his or her related interests and to notify the Corporate Secretary of any changes in their information.

In 2017, none of our directors or executive officers was a participant in or had a relationship regarded as a related person transaction, as considered under applicable regulations of the SEC and the NYSE listing standards.

 Compensation Committee Interlocks and Insider Participation

 

During 2017, Messrs. Felsinger, Gordon, Krapek, Myers, Roughead and Schoewe served as members of the Compensation Committee. During 2017, no member of the Compensation Committee had a relationship with the Company or any of our subsidiaries, other than as directors and shareholders, and no member was an officer or employee of the Company or any of our subsidiaries, a participant in a related person transaction or an executive officer of another entity, where one of our executive officers serves on the board of directors that would constitute a related person transaction or raise concerns of a Compensation Committee interlock.

 Indemnification Agreements

 

Our Bylaws require us generally to indemnify our directors and executive officers to the fullest extent permitted by Delaware law. Additionally, as permitted by Delaware law, we have entered into indemnification agreements with each of our directors and elected officers. Under the indemnification agreements, we have agreed to hold harmless and indemnify each indemnitee, generally to the fullest extent permitted by Delaware law, against expenses, liabilities and loss incurred in connection with threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative to which the indemnitee is made a party by reason of the fact that the indemnitee is or was a director or officer of the Company or any other entity at our request, provided however, that the indemnitee acted in good faith and in a manner reasonably believed to be in the best interests of our Company.

 

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 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

 

Section 16(a) of the Securities Exchange Act of 1934, as amended (Exchange Act), requires our directors and executive officers, and persons who own more than ten percent of our common stock, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC.

Based on our review of Forms 3, 4 and 5 we have received or have filed on behalf of our executive officers and directors, and written representations from those persons that they were not required to file a Form 5, we believe that all required filings, other than one delayed filing for Mrs. Fudge (which resulted from an administrative error by a third party) were made on a timely basis during the year ended December 31, 2017.

 

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Table of Contents

 

 VOTING SECURITIES AND PRINCIPAL HOLDERS

 

 

 Stock Ownership of Certain Beneficial Owners

 

The following entities beneficially owned, to the best of our knowledge, more than five percent of the outstanding common stock as of December 31, 2017. All information shown is based on information reported by the filer on a Schedule 13G filed with the SEC on the dates indicated in the footnotes below.

 

 

  Name and Address of Beneficial Owner

 

  

 

Amount and Nature of

      Beneficial Ownership of Common Stock      

 

 

 

Percent

            of Class            

 

 

BlackRock, Inc.

 

55 East 52nd Street, New York, NY 10055

 

    

 

 

 

13,545,765    

 

(1)

   

 

 

 

7.8%

 

 

 

State Street Corporation

 

One Lincoln Street, Boston, MA 02111

 

    

 

 

 

19,261,080    

 

(2)

   

 

 

 

11.1%

 

 

 

The Vanguard Group

 

100 Vanguard Blvd., Malvern, PA 19355

 

    

 

 

 

13,248,398    

 

(3)

   

 

 

 

7.6%

 

 

 

(1) This information was provided by BlackRock, Inc. (BlackRock) in a Schedule 13G/A filed with the SEC on January 29, 2018. According to BlackRock, as of December 31, 2017, BlackRock had sole voting power over 12,190,349 shares and sole dispositive power over 13,545,765 shares.

 

(2) This information was provided by State Street Corporation (State Street) in a Schedule 13G filed with the SEC on February 14, 2018. According to State Street, as of December 31, 2017, State Street had shared voting and dispositive power over 19,261,080 shares. This total includes 12,074,939 shares held in the Defined Contributions Master Trust for the Northrop Grumman Savings Plan and the Northrop Grumman Financial Security and Savings Program, for which State Street Bank and Trust Company acts as trustee and investment manager.

 

(3) This information was provided by The Vanguard Group (Vanguard) in a Schedule 13G/A filed with the SEC on February 9, 2018. According to Vanguard, as of December 31, 2017, Vanguard had sole voting power over 239,674 shares, sole dispositive power over 12,968,516 shares and shared dispositive power over 279,882 shares.

 

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 VOTING SECURITIES AND PRINCIPAL HOLDERS

 

 

 Stock Ownership of Officers and Directors

 

The following table shows beneficial ownership of our common stock as of March 20, 2018 by each of our current directors, our named executive officers and all directors and executive officers as a group. As of March 20, 2018, there were 174,383,808 shares of our common stock outstanding. None of the persons named below beneficially owns in excess of 1% of our outstanding common stock. Unless otherwise indicated, each individual has sole investment power and sole voting power with respect to the shares owned by such person.

 

    

 

Shares of Common Stock
Beneficially Owned

 

    

 

Share
Equivalents (1)

 

    

 

Total

 

 

Non-Employee Directors

 

                  

 

Marianne C. Brown

 

    

 

 

 

 

—    

 

 

 

      

 

 

 

 

3,371

 

 

 

      

 

 

 

 

3,371

 

 

 

 

Victor H. Fazio

 

    

 

 

 

 

18,368    

 

 

(2)

 

      

 

 

 

 

20,305

 

 

 

      

 

 

 

 

38,673

 

 

 

 

Donald E. Felsinger

 

    

 

 

 

 

—    

 

 

 

      

 

 

 

 

34,340

 

 

 

      

 

 

 

 

34,340

 

 

 

 

Ann M. Fudge

 

    

 

 

 

 

93    

 

 

 

      

 

 

 

 

1,786

 

 

 

      

 

 

 

 

1,879

 

 

 

 

Bruce S. Gordon

 

    

 

 

 

 

—    

 

 

 

      

 

 

 

 

16,325

 

 

 

      

 

 

 

 

16,325

 

 

 

 

William H. Hernandez

 

    

 

 

 

 

1,000    

 

 

 

      

 

 

 

 

3,851

 

 

 

      

 

 

 

 

4,851

 

 

 

 

Madeleine A. Kleiner

 

    

 

 

 

 

971    

 

 

 

      

 

 

 

 

15,339

 

 

 

      

 

 

 

 

16,310

 

 

 

 

Karl J. Krapek

 

    

 

 

 

 

8,194    

 

 

 

      

 

 

 

 

21,139

 

 

 

      

 

 

 

 

29,333

 

 

 

 

Gary Roughead

 

    

 

 

 

 

—    

 

 

 

      

 

 

 

 

7,045

 

 

 

      

 

 

 

 

7,045

 

 

 

 

Thomas M. Schoewe

 

    

 

 

 

 

3,160    

 

 

 

      

 

 

 

 

8,241

 

 

 

      

 

 

 

 

11,401

 

 

 

 

James S. Turley

 

    

 

 

 

 

—    

 

 

 

      

 

 

 

 

2,319

 

 

 

      

 

 

 

 

2,319

 

 

 

 

Mark A. Welsh III

 

    

 

 

 

 

—    

 

 

 

      

 

 

 

 

889

 

 

 

      

 

 

 

 

889

 

 

 

 

Named Executive Officers

 

                  

 

Wesley G. Bush (3)

 

    

 

 

 

 

430,162    

 

 

(4)

 

      

 

 

 

 

5,560

 

 

 

      

 

 

 

 

435,722

 

 

 

 

Kenneth L. Bedingfield

 

    

 

 

 

 

34,340    

 

 

 

      

 

 

 

 

 

 

 

      

 

 

 

 

34,340

 

 

 

 

Gloria A. Flach (5)

 

    

 

 

 

 

87,668    

 

 

 

      

 

 

 

 

 

 

 

      

 

 

 

 

87,668

 

 

 

 

Janis G. Pamiljans

 

    

 

 

 

 

6,677    

 

 

 

      

 

 

 

 

6,224

 

 

 

      

 

 

 

 

12,901

 

 

 

 

Kathy J. Warden

 

    

 

 

 

 

88,011    

 

 

 

      

 

 

 

 

 

 

 

      

 

 

 

 

88,011

 

 

 

 

Other Executive Officers

 

    

 

 

 

 

245,957    

 

 

 

 

      

 

 

 

 

9,176

 

 

 

 

      

 

 

 

 

255,133

 

 

 

 

 

All Directors and Executive Officers as a Group (27 persons)

 

    

 

 

 

 

924,601    

 

 

 

 

      

 

 

 

 

155,910

 

 

 

 

      

 

 

 

 

1,080,511

 

 

    (6) 

 

 

(1) Share equivalents for directors represent non-voting deferred stock units acquired under the 2011 Plan, some of which are paid out in shares of common stock at the conclusion of a director-specified deferral period, and others are paid out upon termination of the director’s service on the Board. Certain of the NEOs hold share equivalents with pass-through voting rights in the Northrop Grumman Savings Plan or the Northrop Grumman Financial Security and Savings Program.

 

(2) Includes 1,141 shares held in our Dividend Reinvestment Plan.

 

(3) Mr. Bush is also Chairman of the Board.

 

(4) Includes 259,053 shares held in the W.G. and N.F. Bush Family Trust, 63,980 shares held in the Bush Trust Number 4 Trust, and 63,979 shares held in the Wesley G. Bush Revocable Trust, each of which Mr. Bush and his wife serve as trustees.

 

(5) Ms. Flach retired from the Company on December 31, 2017.

 

(6) Total represents 0.62% of the outstanding common stock as of March 20, 2018.

 

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 EQUITY COMPENSATION PLAN INFORMATION

 

 

We currently maintain two equity compensation plans: the 2011 Plan and the 1993 Stock Plan for Non-Employee Directors, as amended (1993 Directors Plan). Each of these plans has been approved by our shareholders.

The following table sets forth the number of shares of our common stock to be issued upon payout of outstanding awards and the number of shares remaining available for future award grants under these equity compensation plans as of December 31, 2017.

 

 

  Plan category

 

  

 

Number of shares of
common stock to be
issued upon exercise
of outstanding options and
payout of outstanding
awards (1) (#)

 

  

 

Weighted-average
exercise price of
outstanding options
(2)
($)

 

  

 

Number of shares of    

common stock    
remaining available for future    

issuance under equity    

compensation plans    

(excluding    

shares reflected in the    

first column) (3)    

(#)    

 

 

Equity compensation plans approved by shareholders

 

    

 

 

 

 

1,989,372

 

 

 

 

    

 

 

 

 

N/A

 

 

 

 

    

 

 

 

 

6,295,076    

 

 

 

 

 

Equity compensation plans not approved by shareholders

 

    

 

 

 

 

N/A

 

 

 

 

    

 

 

 

 

N/A

 

 

 

 

    

 

 

 

 

N/A    

 

 

 

 

 

Total

 

    

 

 

 

 

1,989,372

 

 

 

 

    

 

 

 

 

N/A

 

 

 

 

    

 

 

 

 

6,295,076    

 

 

(4)

 

 

(1) This number includes 955,588 shares that were subject to outstanding stock awards granted under the 2011 Plan, 462,245 awards earned at year end but pending distribution subject to final performance adjustments, 136,019 shares subject to outstanding stock unit credited under the 2011 Plan and 1993 Directors Plan, and additional performance shares of 435,521, which reflect the number of shares deliverable under payment of outstanding restricted performance stock rights, assuming maximum performance criteria have been achieved.

 

(2) There were no options outstanding as of December 31, 2017.

 

(3) Of the aggregate number of shares that remained available for future issuance, 6,295,076 were available under the 2011 Plan as of December 31, 2017. No new awards may be granted under the 1993 Directors Plan.

 

(4) After giving effect to our February 2018 awards, the number of shares of common stock remaining available for future issuance would be 5,900,763 (assuming maximum payout of such awards).

 

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 PROPOSAL TWO: ADVISORY VOTE ON COMPENSATION OF NAMED EXECUTIVE OFFICERS

 

 

Consistent with Section 14A of the Exchange Act, we are providing our shareholders with the opportunity to cast a non-binding, advisory vote on the compensation of our NEOs. This advisory vote, commonly known as “say-on-pay,” gives our shareholders the opportunity to express their view on our 2017 executive compensation programs and policies for our NEOs. The vote does not address any specific item of compensation and is not binding on the Board; however, as an expression of our shareholders’ views, the Compensation Committee seriously considers the vote when making future executive compensation decisions. The Board has adopted a policy of providing for annual advisory votes on the compensation of our NEOs.

We believe our compensation programs reflect responsible, measured practices that effectively incentivize our executives to dedicate themselves fully to value creation for our shareholders, customers and employees. Our pay practices are aligned with our shareholders’ interests and with leading industry practice and are governed by a set of strong policies. Examples include:

 

·   Double-trigger provisions for change in control situations, and no excise tax gross-ups for payments upon termination after a change in control;

 

·   A recoupment policy applicable to cash and equity incentive compensation payments;

 

·   Stock ownership guidelines of 7x base salary for the CEO and 3x base salary for other NEOs, and stock holding requirements of three years from the vesting date for equity awards; and

 

·   Prohibitions on hedging or pledging of Company stock.

For a more extensive list of our best practices, refer to page 33 of this Proxy Statement. In addition, our Compensation Discussion and Analysis (CD&A) provides a detailed discussion of our performance-based approach to executive compensation. We encourage you to read the CD&A, the rest of this Proxy Statement and our 2017 Form 10-K, which describes our business and 2017 results in more detail.

Recommendation

The compensation of our executives is aligned to performance, is sensitive to shareholder returns, appropriately motivates and retains our executives, and is a competitive advantage in attracting and retaining the high caliber talent necessary to drive our business forward and build sustainable value for our shareholders. Accordingly, the Board recommends that shareholders approve the following resolution:

“RESOLVED, that, as an advisory matter, the shareholders of Northrop Grumman Corporation approve the compensation paid to the Company’s named executive officers as disclosed in this Proxy Statement pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion.”

Vote Required

Approval of this proposal requires that the votes cast “for” the proposal exceed the votes cast “against” the proposal. Abstentions and broker non-votes will have no effect on this proposal.

 

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” PROPOSAL TWO.

 

 

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 EXECUTIVE COMPENSATION

 

 

 Compensation Discussion and Analysis

 

In this CD&A, we provide an overview of our executive compensation programs and the underlying philosophy used to develop the programs. We describe the material components of our executive compensation programs for our 2017 NEOs and explain how and why our Board’s Compensation Committee arrived at certain specific compensation policies and decisions. We refer to certain non-GAAP (accounting principles generally accepted in the United States of America) financial measures, which are identified with asterisks. For more information, including definitions, reconciliations to the most directly comparable GAAP measure and why we believe these measures may be useful to investors, see “Appendix A - Use of Non-GAAP Financial Measures.” The 2017 NEO compensation is provided in the Summary Compensation Table on page 49 and other compensation tables contained in this Proxy Statement.

2017 NEOs

WESLEY G. BUSH

KENNETH L. BEDINGFIELD

GLORIA A. FLACH (1)

JANIS G. PAMILJANS (2)

KATHY J. WARDEN

(1) Ms. Flach retired from the Company on December 31, 2017.

(2) Mr. Pamiljans was elected Corporate Vice President and President, Aerospace Systems (President, Aerospace Systems) effective April 1, 2017. References to Mr. Pamiljans’ compensation prior to April 1, 2017 in this CD&A include compensation for service as an appointed officer in the role of Vice President and General Manager.

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  EXECUTIVE SUMMARY

 

 

 Summary of Our Executive Compensation Programs

 

Our executive compensation philosophy is to provide a complementary set of compensation programs to our NEOs with attractive, flexible and market-based total compensation tied to annual and long-term performance and aligned with the interests of our shareholders. The key elements of our compensation programs for our NEOs are summarized below.

 

       

Compensation Element

 

      Purpose       Key Characteristics
           

Fixed    

Component    

   

 

Base Salary

 

   

 

Compensate fairly and competitively

 

   

 

Determined by level of responsibility, competitive market pay assessment and individual performance

 

           
   

 

Long-Term Incentive Plan (LTIP) Restricted Stock Rights (RSRs)

   

 

Link the interests of our executive officers to shareholders and retain executive talent

 

   

 

30% of annual LTIP grant

 

Three-year cliff vesting

           

Performance-    

Based    

Component    

    Annual Incentive Plan (AIP)     Motivate and reward achievement of annual business objectives    

Financial Metrics

Pension-adjusted Operating Margin (OM) Rate*,

Cash Flow from Operations Conversion* and Pension-adjusted Net Income* Growth

 

Subject to downward adjustment for failure to achieve non-financial objectives

 

           
    LTIP Restricted Performance Stock Rights (RPSRs)     Link the interests of our executive officers to shareholders, motivate and reward achievement of long-term strategic goals and retain executive talent    

70% of annual LTIP grant

 

Three-year performance period

 

Actual shares earned are weighted 50% to relative TSR and 50% to Cumulative Free Cash Flow* (Cumulative FCF*)

 

  * This metric is a non-GAAP financial measure. For more information, see “Appendix A - Use of Non-GAAP Financial Measures.”

 Our Compensation Pay Practices (pages 36 - 47)

 

Our compensation programs incorporate best practices, including the following:

 

Best Practices

 

·  Pay for Performance

 

·  Above Target and Maximum Annual Incentive Payouts Only When We Outperform Our Peer Benchmarks

 

·  Long-Term Incentives Focused on Performance

 

·  Cap on Annual Bonuses and Performance-Based Long-Term Incentive Share Payouts

 

·  Total Direct Target Compensation Aimed at Market Median

 

·  Annual Peer Group Review

 

·  Independent Consultant Reports Directly to Compensation Committee

 

·  Double Trigger Provisions for Change in Control

 

·  No Individual Change in Control Agreements

 

·  No Excise Tax Gross-ups for Payments Received Upon Termination After a Change in Control

 

·  No Hedging or Pledging of Company Stock

 

·  Dividends Paid Upon Vesting

 

·  Recoupment Policy on Incentive Compensation Payments

 

·  Stock Ownership Guidelines and Stock Holding Requirements

 

·  Regular Risk Assessments Performed

 

·  No Employment Contracts for CEO or other NEOs

 

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Table of Contents

 

 COMPENSATION DISCUSSION AND ANALYSIS  |  EXECUTIVE SUMMARY

 

 

 2017 Performance Highlights

 

We continued to generate strong financial results in 2017, including higher segment operating income and, excluding 2017 tax reform and our related discretionary pension contribution impacts, higher earnings, cash from operations and free cash flow*. 2017 diluted earnings per share were $11.47 and excluding 2017 tax reform and our related discretionary pension contribution impacts were $13.28*. Our strong cash generation allowed us to invest $928 million in our business and return more than $1 billion to our shareholders through share repurchases and dividends. Operational performance and effective capital deployment supported a 33.9% TSR in 2017.

Earnings Per Share

 

LOGO

Total Shareholder Return

 

LOGO

* This metric is a non-GAAP financial measure. For more information, see “Appendix A - Use of Non-GAAP Financial Measures.”

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  EXECUTIVE SUMMARY

 

 

Management and the Compensation Committee believe our executive compensation programs are competitive and support achieving strong financial performance while investing for profitable growth and value creation over the long-term. A 96% shareholder majority approved last year’s say-on-pay proposal, and our ongoing shareholder engagement indicates continued support for the structure and elements of our executive incentive compensation programs.

 Performance Incentive Compensation Metrics

 

2017 results, which have been adjusted to exclude the impacts of the Tax Cuts and Jobs Act (the “2017 Tax Act”), for AIP metrics:

 

·   Pension-adjusted OM Rate*: 10.5%

 

·   Cash Flow from Operations Conversion*: 127%

 

·   Pension-adjusted Net Income* Growth: $1.93B

For the LTIP, our three-year TSR score covering 2015-2017 was at the 89th percentile as measured against the 2015 Performance Peer Group identified on page 38 and the 96th percentile as measured against the S&P industrials. Over the last three years, the weighting of our LTIP RPSR metrics has transitioned from 100% TSR in 2015-2017 to 70% TSR and 30% Cumulative FCF* in 2016-2018 to the current 50% TSR and 50% Cumulative FCF* weighting. The weighting transition reflects a desire for a better balance between relative TSR performance and an operational metric more directly impacted by management decisions and behaviors.

 Compensation Mix

 

We have a balanced pay for performance compensation structure that places an appropriate level of compensation at risk, based on our financial and non-financial performance measures and relative TSR. The AIP award is determined by our financial performance and is subject to a downward only adjustment for performance against non-financial goals. For NEOs, the value of LTIP RPSR compensation is weighted 50% to relative TSR and 50% to Cumulative FCF*. Achievement of both annual and long-term incentive goals will result in individual awards commensurate with results; however, if absolute TSR is negative, the maximum relative TSR payout is capped at 100%, even if the relative TSR would have resulted in a higher score. The following charts show performance-based compensation elements at target values.

 

LOGO

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  KEY PRINCIPLES

 

 

 Compensation Philosophy and Objectives

 

We provide an attractive, flexible and market-based total compensation program tied to performance and aligned with the interests of our shareholders. Our objective is to recruit and retain the caliber of executives and other key employees capable of achieving top performance and generating value for our shareholders, customers and employees.

Our goal is to lead our industry in sustainable performance, while maintaining strong, enduring values. The targets and thresholds of our AIP are based on the performance of our peers and the market. Our 2017 LTIP metrics are based on (1) TSR relative to our Performance Peer Group and the S&P Industrials and (2) Cumulative FCF*. For each plan, we selected metrics that drive shareholder value and benchmark our performance against our peers and the market. Our executive compensation and benefit programs are guided by the following principles:

 

 

Pay for Performance

 

·   Our incentive plans are based on peer and market benchmarked performance metrics.

 

 

Leadership Retention and Succession

 

·   Compensation is designed to be competitive within our industry and retain top talent.

 

·   Programs are designed to motivate and reward NEOs for delivering operational and strategic performance over time.

 

 

 

Sustainable Performance

 

·   Our AIP includes both financial and non-financial metrics to ensure we are building a strong foundation for long-term sustainable performance and shareholder value creation.

 

 

 

Alignment with Shareholder Interests

 

·   Our compensation structure places an appropriate amount of compensation at risk based on annual and long-term results.

 

·   At-risk compensation is based on financial and non-financial performance measures and relative TSR.

 

·   A significant portion of compensation is delivered in equity, the vesting and value of which provides alignment with shareholder returns.

 

·   Stock ownership guidelines, holding requirements for equity awards and our recoupment policy further align executive and shareholder interests.

 

 

 

Benchmarking

 

·   Compensation program provisions and financial objectives are evaluated on an annual basis and modified in accordance with industry and business conditions.

 

·   We seek to outperform our peers (a group of top global defense companies identified as the Performance Peer Group on page 38).

 

·   We use a Target Industry Peer Group (identified on page 39) for broader market executive compensation analyses that includes companies based on a peer-of-peers analysis.

 

 

 

Compensation Risk Management

 

·   The Compensation Committee, together with its independent compensation consultant, conducts an annual assessment of the compensation programs to determine if there are potential material risks to the Company.

 

·   Both the Compensation Committee and its independent compensation consultant evaluate the mix of at-risk compensation linked to stock appreciation.

 

·   The assessment is to confirm there is an appropriate balance in the executive compensation programs, practices and policies.

 

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  KEY PRINCIPLES

 

 

 How We Make Compensation Decisions

 

Role of the Compensation Committee

The Compensation Committee is responsible for overseeing our compensation policies, incentive and equity compensation plans and approving payments or grants under these plans for elected officers (other than the CEO). The Compensation Committee recommends the compensation for our CEO to the independent directors of the Board for approval and approves the compensation for the other NEOs. In performing its duties, the Compensation Committee:

 

·   retains an independent compensation consultant which reports directly to the Compensation Committee and is discussed further below;

 

·   reviews market data and other input from its independent compensation consultant;

 

·   reviews and approves incentive goals and objectives (CEO goals and objectives are reviewed and approved by the independent directors);

 

·   evaluates and approves executive benefit and perquisite programs; and

 

·   evaluates the competitiveness of each elected officer’s total compensation package.

In addition, the Compensation Committee annually reviews and discusses with management the CD&A and provides a Compensation Committee Report for inclusion in the proxy statement.

For more information regarding the composition of the Compensation Committee and its duties and responsibilities, see “Corporate Governance – Committees of the Board of Directors – Compensation Committee.”

Role of the Independent Compensation Consultant

The Compensation Committee retains an independent compensation consultant, Frederic W. Cook & Co. (the Compensation Consultant). The Compensation Consultant reports directly to the Compensation Committee, and the Compensation Committee may replace the Compensation Consultant or hire additional consultants at any time. A representative of the Compensation Consultant regularly attends meetings of the Compensation Committee and communicates with the Compensation Committee Chairperson between meetings as needed; however, the Compensation Committee and the independent directors of the Board make final decisions on the compensation actions for the NEOs. The Compensation Consultant regularly meets in executive session with the Compensation Committee. Other than the fees paid to the Compensation Consultant pursuant to its engagement by the Compensation Committee for its advice on executive and director compensation, the Compensation Consultant does not receive any fees or income from the Company.

The Compensation Consultant’s role is to provide an independent review of market data and to advise the Compensation Committee on the levels and structure of our executive compensation policies and procedures, including compensation matters for NEOs. The Compensation Consultant utilizes aerospace and defense industry market data and conducts an independent review of publicly available data.

The roles of the Compensation Consultant include:

 

·   reviewing and advising the Compensation Committee on our total compensation philosophy, peer groups and target competitive positioning;

 

·   identifying market trends and practices and advising the Compensation Committee on program design implications;

 

·   providing proactive advice to the Compensation Committee on best practices for Board governance of executive compensation, compensation-related risk management, and any areas for program design to most appropriately support the Company’s business strategy and organizational values; and

 

·   serving as a resource to the Compensation Committee Chairperson on setting agenda items for Compensation Committee meetings and undertaking special projects.

In February 2018, the Compensation Committee determined that there were no relationships between the Compensation Consultant and the Company or any of the Company’s directors or executive officers that raised a conflict of interest.

Role of Management

Our CEO makes compensation-related recommendations for elected officers to the Compensation Committee for its review and approval. The CEO’s evaluation is based on each officer’s compensation relative to market and the overall framework, philosophy and objectives for our executive compensation programs set by the Compensation Committee.

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  KEY PRINCIPLES

 

 

The recommendations for elected officers are based on an assessment of each executive’s performance, skills and industry knowledge, market compensation benchmarks, and succession and retention considerations. The Chief Human Resources Officer provides a summary of historical compensation and benefits-related data when compensation decisions are considered by the Compensation Committee to ensure compensation decisions are made within our total compensation framework.

Management also provides recommendations to the Compensation Committee regarding executive incentive and benefit plan designs and strategies. These recommendations include financial and non-financial operational goals and criteria for our annual and long-term incentive plans.

 Use of Competitive Data

 

Performance Peer Group: Set Performance Targets and Evaluate Performance

The Compensation Committee uses the Performance Peer Group for purposes of setting performance targets and evaluating performance for our AIP and LTIP. The Performance Peer Group is comprised of the largest global defense companies by government revenues within the aerospace and defense market space. AIP goals for 2017 and goals for the LTIP grants made during 2017 that will vest in 2019 were established based on the 2017 Performance Peer Group.

 

 

2017 PERFORMANCE PEER GROUP

 

 

BAE Systems

 

 

Harris Corporation

 

 

Lockheed Martin Corporation

 

The Boeing Company

 

 

L3 Technologies, Inc.

 

 

Raytheon Company

 

Booz Allen Hamilton Holding Corporation

 

 

Leidos Holdings, Inc.

 

 

Thales Group

 

General Dynamics Corporation

 

 

Leonardo

   

Performance targets for the LTIP grants for the three-year performance period vesting in 2017 were established in 2015, based on the 2015 Performance Peer Group.

 

 

2015 PERFORMANCE PEER GROUP

 

 

BAE Systems

 

 

Finmeccanica (1)

 

 

Lockheed Martin Corporation

 

The Boeing Company

 

 

General Dynamics Corporation

 

 

Raytheon Company

 

Booz Allen Hamilton Holding Corporation

 

 

L-3 Communications Holdings, Inc. (2)

 

 

Thales Group

  (1) Finmeccanica changed its name to Leonardo in 2016

  (2) L-3 Communications Holdings, Inc. changed its name to L3 Technologies, Inc. in 2016

Target Industry Peer Group: Benchmark Executive Compensation Practices

The Compensation Committee benchmarks our executive compensation levels and practices against a Target Industry Peer Group of 14 companies, as well as against a subset of the Target Industry Peer Group containing six direct peers. Prior to the beginning of the year, the Compensation Committee sets the Target Industry Peer Group and the subset of direct peers used to benchmark compensation for the following year. To identify peer companies for compensation benchmarking purposes, the Compensation Consultant employed an objective criteria-based methodology where:

 

·   the company was identified as a peer by at least two aerospace and defense peers or proxy advisory services;

 

·   the company participated in the annual Aon Hewitt executive compensation study; and

 

·   revenues, total employees and market capitalization of the company were broadly similar to those of the Company.

 

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  KEY PRINCIPLES

 

 

While the Target Industry Peer Group is reviewed annually by the Compensation Committee with the Compensation Consultant, our goal is to keep it as consistent as reasonably possible on a year-over-year basis. The companies that comprise the 2017 Target Industry Peer Group are listed in the following table:

 

 

2017 TARGET INDUSTRY PEER GROUP

 

 

3M Company

 

 

Johnson Controls International

 

The Boeing Company (1)

 

 

L3 Technologies, Inc. (1)

 

Caterpillar Inc.

 

 

Lockheed Martin Corporation (1)

 

Eaton Corporation

 

 

Raytheon Company (1)

 

Emerson Electric Company

 

 

Rockwell Collins, Inc.

 

General Dynamics Corporation (1)

 

 

Textron Inc.

 

Honeywell International Inc. (1)

 

 

United Technologies Corporation

 

(1) Included in the subset of six direct peers also used for compensation benchmarking

It is the Company’s pay philosophy to provide the CEO a compensation package that comprises competitive elements of base salary and target variable pay relative to the Target Industry Peer Group. In 2017, the CEO’s target total direct compensation approximated the median of the Target Industry Peer Group.

Another element of the Company’s pay philosophy is to tie a significant portion of the CEO’s pay to performance. As a result, the CEO’s actual compensation may differ from this market median based on the Company’s actual performance.

In determining the base salary and target variable pay elements for the other NEOs, the Compensation Committee does not set any specific benchmark relative to the Target Industry Peer Group; rather, the Compensation Committee considers several factors in determining their compensation, including executive compensation levels and practices of the Target Industry Peer Group, NEO individual experience, growth in job as demonstrated through sustained performance, leadership impact, retention and pay relative to the CEO. Actual annual incentive awards and long-term incentive award opportunities reflect these factors, as well as Company performance.

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  KEY COMPONENTS OF OUR PROGRAMS

 

 

 Annual Incentive Compensation

 

Under our shareholder-approved 2002 Incentive Compensation Plan (the Plan), the Compensation Committee approves the annual incentive compensation target payout percentage for each NEO other than the CEO. For the CEO, such percentage is approved by the independent directors of the Board.

The target incentive award (target bonus) represents a percentage of each NEO’s base salary. Following the completion of the fiscal year, the target bonus is used by the Compensation Committee, together with its assessment of Company performance against pre-determined performance criteria, to determine the final bonus award amount.

2017 Annual Incentive Plan

The 2017 target bonus for the CEO was 180% of base salary, which was unchanged from 2016. For each of the other NEOs, the 2017 target bonus was 100% of base salary, which was also unchanged from 2016. Upon Mr. Pamiljans’ promotion effective April 1, 2017, his target bonus was increased to 100% of base salary. Mr. Pamiljans’ 2017 target bonus and final bonus award were prorated to reflect the time he served in his role as an elected officer and as an appointed officer.

The final bonus award for each NEO was determined by multiplying the Northrop Grumman Company Performance Factor (CPF) by the target bonus. The CPF can range from 0% to 200% in the annual incentive formula described below.

Annual Incentive Formula for 2017:

 

LOGO

At the end of each year, the CEO conducts an annual performance evaluation for each NEO, other than himself, and then reviews the evaluation with the Compensation Committee. The Compensation Committee reviews Company performance information, as well as the comparison to market data.

The Compensation Committee approves bonus amounts for all NEOs except the CEO, whose annual bonus is recommended by the Compensation Committee to the independent members of the Board for approval. The Compensation Committee has discretion to make adjustments to the annual bonus payouts for NEOs, except the CEO, if it determines such adjustment is warranted. For example, in instances where Company performance has been impacted by unforeseen or unusual events (e.g., the 2017 Tax Act), the Compensation Committee has exercised its authority to increase the final awards as necessary to preserve the intended incentives and benefits. The Compensation Committee has also adjusted payouts downward in the past despite performance targets having been met when it determined that particular circumstances had a negative impact on the Company but were not reflected in the performance calculation.

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  KEY COMPONENTS OF OUR PROGRAMS

 

 

2017 Annual Incentive Goals and Results

 

 

 2016 Financial Metrics

 

 

 

Weighting     

 

     

 

 2017 Financial Metrics

 

 

 

Weighting     

 

 

Pension-adjusted OM Rate*

 

 

 

30%    

 

     LOGO     

 

Pension-adjusted OM Rate*

 

 

 

1/3    

 

 

Cash Flow from Operations Conversion*

 

 

 

30%    

 

   

 

Cash Flow from Operations Conversion*

 

 

 

1/3    

 

 

Pension-adjusted Net Income* Growth

 

 

 

30%    

 

   

 

Pension-adjusted Net Income* Growth

 

 

 

1/3    

 

 

Awards (Book-to-Bill)

 

 

 

10%    

 

     

* This metric is a non-GAAP financial measure. For more information, see “Appendix A - Use of Non-GAAP Financial Measures.”

For the AIP, we use a mix of financial and non-financial metrics to measure our performance. For 2017, the Compensation Committee refined our AIP financial metrics and weightings, reflecting our commitment to investing for and achieving long-term profitable growth; maintaining alignment with shareholders’ interests; and incentivizing top performance against our industry peers. The Compensation Committee approved the following metrics, equally weighted at 1/3:

 

·   Pension-adjusted OM Rate*: establishes high program performance expectations for the Company and is calculated as OM rate (operating margin divided by sales) before net FAS/CAS pension adjustment* (the difference between pension expense charged to contracts and included as cost in segment operating income in accordance with U.S. Government Cost Accounting Standards (CAS) and pension expense determined in accordance with GAAP (FAS)).

 

·   Cash Flow from Operations Conversion*: recognizes the importance of converting net income into cash. The metric is calculated as cash provided by operating activities before the after-tax impact of discretionary pension contributions* divided by net income. Cash Flow from Operations Conversion* enables management to make capital investment decisions that support long-term profitable growth without impacting performance-based incentive compensation.

 

·   Pension-adjusted Net Income* Growth: incentivizes management to achieve relative long-term profitable growth greater than a projected industry growth rate. Pension-adjusted Net Income* Growth is calculated as net income before the after-tax impact of the net FAS/CAS pension adjustment* and is based on a three-year growth trajectory.

In addition to these financial goals, we established non-financial goals to align our objectives with all our stakeholders. Performance against non-financial metrics can result only in a downward adjustment to the financial metric score. For 2017, we selected the following non-financial metrics:

 

·   Customer Satisfaction: measured in terms of customer feedback, including customer-generated performance scores, award fees and verbal and written feedback.

 

·   Quality: measured using program-specific objectives, including defect rates, process quality, supplier quality, planning quality or other appropriate criteria for program type and phase.

 

·   Engagement & Inclusion: measured based on performance at or above the global high performing norm for engagement and inclusion indices and an accountability metric (as reported in a company-wide employee survey).

 

·   Diversity: measured in terms of improving representation of females and people of color in all management level positions with respect to internal and external benchmarks.

 

·   Safety: measured by total case rate, defined as the number of Occupational Safety & Health Administration recordable injuries as well as by lost work day rate associated with those injuries.

 

·   Environmental Sustainability: measured in terms of reductions in absolute greenhouse gas emissions and potable water use consumption, and improvement in solid waste diversion (i.e., waste diverted from landfill disposal).

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  KEY COMPONENTS OF OUR PROGRAMS

 

 

Our AIP provides for payout levels from 0% to 200% of target. The minimum, target and maximum performance levels are derived based on an analysis of the past performance of our Performance Peer Group (Pension-adjusted Net Income* Growth is based on projected market growth rates). Specific values are identified for each metric at selected points in the range between minimum and maximum and other values are determined by linear interpolation between these points. No payout is made if performance is below the minimum. Above target payout can be earned only if the Company’s performance exceeds the performance threshold noted in the table below. The maximum 200% payout is based upon top quartile past performance of the Performance Peer Group. This structure rewards superior performance by aligning above-target payouts to outperforming our peer benchmarks and provides reduced awards for below target performance. Based on Company performance for the three financial metrics shown in the table below, which have been adjusted to exclude the impact of the 2017 Tax Act, the 2017 CPF was 131%. No downward adjustment was made for non-financial metric performance as the Compensation Committee determined that performance, in aggregate, against the non-financial goals, met the Company’s stated objectives.

 

  Metric/Goal

 

  

Weighting

 

  

 

Performance to Achieve
Target Payout

 

  

2017
Performance

 

  

2017 Score      

 

 

Pension-adjusted OM Rate*

 

   1/3

 

   10.0%

 

   10.5%

 

   44%

 

 

Cash Flow from Operations Conversion*

 

   1/3

 

   145%

 

   127%

 

   20%

 

 

Pension-adjusted Net Income* Growth

 

   1/3

 

   $1.67B

 

   $1.93B

 

   67%

 

 

Company Performance Factor

 

                  131%

 

  * This metric is a non-GAAP financial measure. For more information, see “Appendix A - Use of Non-GAAP Financial   Measures.”

Decisions for 2017

In February 2018, the Compensation Committee applied the CPF to Mr. Bush’s target bonus. Based on the CPF, in February 2018, the Committee recommended, and the independent members of our Board approved, a 2017 annual incentive award of $3,662,000 for Mr. Bush. Based on the CPF, the CEO recommended, and the Compensation Committee approved, the other NEOs’ annual incentive awards.

 

  Name

 

    

Target Payout
% of Salary

 

    

 

Payout Range
% of Salary

 

    

Actual Payout
% of Salary

 

    

Actual Payout (1)     

 

 

Wesley G. Bush

 

     180%

 

     0% - 360%

 

     236%

 

     $3,662,000

 

 

Kenneth L. Bedingfield

 

     100%

 

     0% - 200%

 

     131%

 

     $1,041,000

 

 

Gloria A. Flach

 

     100%

 

     0% - 200%

 

     131%

 

     $1,061,000

 

 

Janis G. Pamiljans (2)

 

     93%

 

     0% - 186%

 

     121%

 

     $861,000

 

 

Kathy J. Warden

     100%

 

     0% - 200%

 

     131%

 

     $1,061,000

 

(1) The potential range of bonus payouts based on 2017 performance is disclosed in the Grants of Plan-Based Awards Table. Actual bonus payouts for 2017 performance are disclosed above and in the Summary Compensation Table.

(2) Mr. Pamiljans was elected President, Aerospace Systems effective April 1, 2017. His target and actual payout under the AIP is prorated to reflect time served as an elected officer and as an appointed officer.

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  KEY COMPONENTS OF OUR PROGRAMS

 

 

 Long-Term Incentive Compensation

 

2017 Long-Term Incentive Program

In determining the amount of individual long-term incentive award for an NEO (other than the CEO), the Compensation Committee considers an elected officer’s individual performance during the preceding year, growth in job as demonstrated through sustained performance, leadership impact, retention and pay relative to the CEO, as well as market data for the elected officer’s position based on the Target Industry Peer Group analysis.

In 2017, after determining the award value for the NEOs as described above, the Compensation Committee granted awards in the form of RPSRs to ensure sustainability and achievement of business goals over time and RSRs to provide retention value. The awards were comprised of 70% RPSRs and 30% RSRs. The Committee determined this long-term incentive mix would appropriately motivate and reward the NEOs to achieve our long-term objectives and further reinforce the link between their interests and the interests of our shareholders.

The RPSRs will vest and be distributed following the completion of the three-year performance period (2017-2019) if goals are met. The RSRs generally vest 100% after three years. Vesting for termination due to death, disability or retirement is discussed in the Terms of Equity Awards section. For the 2017 grant, dividend equivalents accrue on both RPSR and RSR awards earned and will be paid upon distribution of the RPSRs and RSRs.

The Compensation Committee evaluates RPSR performance requirements each year to ensure they are aligned with our business objectives. For the 2017 RPSR grant, the Compensation Committee determined that for the NEOs, performance will continue to be measured in terms of relative TSR and Cumulative FCF*; however, in order to increase management’s focus on the operational metrics that drive long-term shareholder value creation, the weighting of Cumulative FCF* has been increased to 50% from 30%. Therefore, 2017 RPSR grant performance will be weighted 50% to relative TSR and 50% to Cumulative FCF*. Based on the performance against these metrics, shares earned for 2017 RPSR grants can vary from 0% to 150% of the rights awarded.

TSR is measured by comparing cumulative stock price appreciation with reinvestment of dividends over a three-year period to the Performance Peer Group (50% of relative TSR portion of award) and to the S&P Industrials (50% of relative TSR portion of award), which comprises companies within the S&P 500 classified as Industrials, reflecting the range of similar investment alternatives available to our shareholders. To smooth volatility in the market, the TSR calculation is based on the average of the 30 calendar days immediately prior to the start of the performance period and the last 30 calendar days of the performance period. The maximum relative TSR payout is capped at 100% of target shares if the absolute TSR is negative, even if the relative TSR would have resulted in a higher score.

Cumulative FCF* focuses on cash generation after capital investments and is calculated as the aggregate free cash flow before the after-tax impact of total pension funding* over a three-year period. Free cash flow* includes funds available to create shareholder value after investing in the business through capital expenditures.

On February 17, 2017, prior to his promotion, Mr. Pamiljans received an annual long-term incentive award as an appointed officer. The terms associated with this award are disclosed in the Grants of Plan-Based Awards Table on page 52.

Recently Completed RPSR Performance Period (2015 – 2017)

In February 2015, when granting RPSRs to NEOs who were elected officers at the time of the grant, the Compensation Committee selected relative TSR as the performance metric for the awards and established the performance criteria for the awards as set forth in the table below. In February 2018, the Compensation Committee reviewed performance for the January 1, 2015 to December 31, 2017 RPSR performance period.

 

          Percentile Required to Score       

   Metric/Goal

 

  

Weighting

 

  

0%

 

  

100%

 

  

150%

 

  

2017 Actual       
Performance        

 

 

  Relative TSR - 2015 Performance Peer Group

 

   50%

 

   25th

 

   50th

 

   80th

 

   89th

 

 

  Relative TSR - S&P Industrials

 

   50%

 

   25th

 

   50th

 

   80th

 

   96th

 

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  KEY COMPONENTS OF OUR PROGRAMS

 

 

Decisions for 2017

Based on 2015 - 2017 TSR performance, we ranked second against the 2015 Performance Peer Group and were in the 89th percentile. We were in the 96th percentile of the S&P Industrials. The combined weighted score generated an overall performance score of 150% for NEOs who were elected officers at the time of the grant.

In February 2018, the NEOs received payouts in stock with respect to the RPSR awards that were granted in February 2015 for the three-year performance period ending December 31, 2017 (as described further in footnote 3 to the Outstanding Equity Awards Table on page 54).

 Other Benefits

 

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 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, on pages 56 and 60, respectively.

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 nonqualified supplemental defined benefit plans in which our NEOs participate were frozen as to 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. Participants in the SORMP are entitled to retiree medical benefits and life insurance pursuant to the terms of the Plan. Mr. Bush is eligible for SORMP benefits due to his date of hire and years of service as an executive. The other NEOs became elected officers after the SORMP was closed to new participants and are not eligible for SORMP benefits. 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.

Perquisites

Our NEOs are eligible for certain limited executive perquisites that include financial planning, income tax preparation, physical exams and personal liability insurance. The Compensation Committee believes these 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 2017 are detailed in the Summary Compensation Table on page 49.

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. Based on security threat information obtained and an ongoing dialogue with law enforcement officials, the Board has required that Mr. Bush and other 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 Section 132 of the Internal Revenue Code.

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  KEY COMPONENTS OF OUR PROGRAMS

 

 

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.

We regularly review the nature of the security threat and associated vulnerabilities with law enforcement and security specialists and will continue to revise our security program as appropriate.

Severance Benefits

We maintain the Severance Plan for Elected and Appointed Officers of Northrop Grumman Corporation (Severance Plan), which is available to our NEOs (other than the CEO) who qualify and are approved to receive such benefits. Mr. Bush is not eligible to participate in a Northrop Grumman severance plan. 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. 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 prorated performance bonus for the year of termination, (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).

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 grants under the 2011 Long-Term Incentive Stock Plan (2011 Plan).

 Policies and Procedures

 

Stock Ownership Guidelines

We maintain stock ownership guidelines for our NEOs to further promote alignment of management and shareholder interests. These guidelines require that NEOs own Company stock with a value denominated as a multiple of their annual salaries, which 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 and Chief Executive Officer

  

 

7x base salary

 

 

Other NEOs

  

 

3x base salary

Shares that satisfy the stock ownership guidelines include:

 

·   Company stock owned outright;

 

·   unvested RSRs; and

 

·   the value of shares held in the Northrop Grumman Savings Plan or Northrop Grumman Financial Security and Savings Program.

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, 2017, all NEOs were in compliance with the ownership guidelines. The Compensation Committee continues to monitor compliance and will conduct a full review again in 2018.

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  KEY COMPONENTS OF OUR PROGRAMS

 

 

Stock Holding Requirements

We have a holding period requirement for payouts from long-term incentive grants, further emphasizing the importance of sustainable performance and appropriate risk-management behaviors. Under this policy, NEOs are required to hold, for a period of three years, 50% of their net after-tax shares received from RSR vestings and RPSR distributions. These restrictions generally continue following termination and retirement; however, shares acquired from RPSR distributions following termination or retirement occurring more than one year after separation from the Company are not subject to the holding requirement.

Anti-Hedging and Pledging Policy

Company policy prohibits our NEOs and other elected officers from hedging, entering into margin transactions involving Company stock, and pledging Company securities as collateral for loans or other transactions.

Recoupment Policy

The Company’s recoupment policy provides that:

 

·   the Board has discretion to recoup incentive compensation paid to an elected officer in the event of a restatement or if an elected officer engages in illegal conduct that causes significant financial or reputational harm to the Company;

 

·   the Board has discretion to recoup incentive compensation paid to the elected officer in the event the elected officer fails to report such misconduct of another, or is grossly negligent in fulfilling his or her supervisory responsibilities to prevent such misconduct; and

 

·   the CEO has discretion to recoup under similar circumstances incentive compensation provided to non-elected officers or other employees.

The Company’s recoupment policy applies to a three-year look back of performance-based short or long-term, cash or equity incentive payments. It provides for certain disclosure in the event of recoupment, consistent with SEC and other legal requirements.

Risk Management

The Compensation Committee annually reviews our compensation program and together with the independent compensation consultant assesses potential compensation-related risks to the Company. Based on this assessment for 2017, the Compensation Committee determined that the risk profile is appropriate and substantial risk management features are incorporated into our compensation program. This determination reflects the following conclusions from the detailed risk assessment:

 

·   there is appropriate balance to mitigate compensation-related risk in the executive compensation program’s design between fixed and variable pay, cash and stock components, short- and long-term measures, financial and non-financial measures, and formulaic and discretionary decisions;

 

·   there are appropriate policies in place to mitigate compensation-related risk including the Compensation Committee’s and its advisor’s independence, transparent disclosure, officer stock ownership guidelines and holding period requirements, and hedging and recoupment policies; and

 

·   there are no incentive or commission arrangements below the executive level that potentially encourage excessive risk-taking behavior.

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 each of these compensation components at the same time, utilizing a total compensation philosophy. The Compensation Committee reviews and approves annual long-term incentive grants during its scheduled meeting, which 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.

Tax Deductibility of Pay

Under prior law, Section 162(m) of the Internal Revenue Code generally limited the annual tax deduction to $1 million per person for compensation paid to the Company’s CEO and the next three highest-paid NEOs, other than the Chief Financial Officer (collectively, covered employees). Certain compensation, including qualified performance-based compensation, was not subject to the deduction limit if certain requirements were met.

 

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 COMPENSATION DISCUSSION AND ANALYSIS  |  KEY COMPONENTS OF OUR PROGRAMS

 

 

The 2017 Tax Act enacted on December 22, 2017, modifies Section 162(m). The 2017 Tax Act expands the definition of covered employees to include the Company’s Chief Financial Officer and any employee who was a covered employee for any taxable year beginning after December 31, 2016. The 2017 Tax Act also repeals the performance-based compensation exception to the deduction limit. These amendments, effective January 1, 2018, do not apply to compensation paid pursuant to a written binding contract in effect on November 2, 2017 that was not materially modified after such date.

Say-on-Pay

Our shareholders have been asked annually to approve, on an advisory basis, the compensation paid to our NEOs. We regularly engage with our shareholders to understand their concerns regarding executive compensation. The Compensation Committee annually reviews and discusses the results of the say-on-pay vote. In 2017, our executive compensation programs continued to receive strong support from shareholders with 96% approval at our 2017 Annual Meeting of Shareholders. Based on its review and feedback from shareholder engagement, the Compensation Committee determined that our programs are effective and aligned with shareholder interests, and no substantive changes were required.

 

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 COMPENSATION COMMITTEE REPORT

 

 

The Compensation Committee reviewed and discussed the CD&A with management. Based on such review and discussion, the Compensation Committee recommended to the Board that the CD&A be included in this Proxy Statement. The Board has approved the recommendation.

COMPENSATION COMMITTEE

KARL J. KRAPEK, CHAIRPERSON

DONALD E. FELSINGER

BRUCE S. GORDON

GARY ROUGHEAD

THOMAS M. SCHOEWE

 

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 COMPENSATION TABLES  |  SUMMARY COMPENSATION TABLE

 

 

 2017 Summary Compensation Table

 

  Name & Principal Position

 

Year

   

Salary (1)
($)

 

Bonus (2)
($)

 

Stock
Awards (3)
($)

 

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

 

 

 

 

2017

 

 

 

 

1,548,577

 

 

 

 

9,999,969

 

 

3,662,000

 

 

2,733,390

 

 

925,121

 

 

 

 

18,869,057  

 

 

 

  Chairman, Chief Executive Officer
  and President

 

 

 

 

2016

 

 

 

 

1,530,000

 

 

 

 

10,000,072

 

 

4,406,400

 

 

3,036,744

 

 

868,625

 

 

 

 

19,841,841  

 

 

 

 

 

 

2015

 

 

 

 

1,588,846

 

 

 

 

10,000,018

 

 

3,304,800

 

 

 

 

901,958

 

 

 

 

15,795,622  

 

 

 

  Kenneth L. Bedingfield

 

 

 

 

2017

 

 

 

 

790,192

 

 

 

 

3,250,106

 

 

1,041,000

 

 

 

 

351,426

 

 

 

 

5,432,724  

 

 

 

  Corporate Vice President and
  Chief Financial Officer

 

 

 

 

2016

 

 

 

 

756,539

 

 

 

 

2,999,980

 

 

1,232,000

 

 

 

 

314,724

 

 

 

 

5,303,243  

 

 

 

 

 

 

2015

 

 

 

 

685,077

 

 

 

 

3,000,092

 

 

840,000

 

 

 

 

196,798

 

 

 

 

4,721,967  

 

 

 

  Gloria A. Flach (7)

 

 

 

 

2017

 

 

 

 

807,116

 

 

 

 

3,499,993

 

 

1,061,000

 

 

 

 

184,922

 

 

 

 

5,553,031  

 

 

 

  Corporate Vice President and
  Chief Operating Officer

 

 

 

 

2016

 

 

 

 

792,116

 

 

 

 

3,499,856

 

 

1,272,000

 

 

995,033

 

 

159,738

 

 

 

 

6,718,743  

 

 

 

 

 

 

2015

 

 

 

 

806,538

 

 

 

 

3,500,083

 

 

936,000

 

 

 

 

357,219

 

 

 

 

5,599,840  

 

 

 

  Janis G. Pamiljans (8)

 

 

 

 

2017

 

 

 

 

702,623

 

 

100,000

 

 

3,499,941

 

 

861,000

 

 

369,399

 

 

1,032,397

 

 

 

 

6,565,360  

 

 

 

  Corporate Vice President and
  President, Aerospace Systems

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Kathy J. Warden

 

 

 

 

2017

 

 

 

 

807,116

 

 

 

 

3,499,993

 

 

1,061,000

 

 

388,015

 

 

206,548

 

 

 

 

5,962,672  

 

 

 

  Corporate Vice President and
  President, Mission Systems

 

 

 

 

2016

 

 

 

 

772,500

 

 

 

 

3,499,856

 

 

1,272,000

 

 

200,220

 

 

165,596

 

 

 

 

5,910,172  

 

 

 

 

 

 

2015

 

 

 

 

701,077

 

 

 

 

3,200,053

 

 

814,000

 

 

20,782

 

 

425,763

 

 

 

 

5,161,675  

 

 

 

(1) Includes amounts deferred under the qualified savings and nonqualified deferred compensation plans.

 

(2) Pursuant to a 2016 retention agreement, Mr. Pamiljans received a bonus of $200,000 in two installments ($100,000 each) in 2016 and 2017.

 

(3) Represents the grant date aggregate fair value of RPSRs and RSRs granted during the periods presented. The fair value of awards was computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718 disregarding potential forfeitures. Assumptions used in the calculation of these amounts are disclosed in Note 14 of the Company’s 2017 Form 10-K. The maximum grant date fair values of the 2017 RPSRs are as follows, noting the grants assume a 150% maximum payout other than for Mr. Pamiljans:

 

  Name

 

 

Maximum Grant Date Fair Value   
($)

 

   

 

  Mr. Bush

   

 

 

 

10,500,087

 

   

 

  Mr. Bedingfield

   

 

 

 

3,412,596

 

   

 

  Ms. Flach

   

 

 

 

3,674,895

 

   

 

  Mr. Pamiljans (a)

   

 

 

 

3,884,932

 

   

 

  Ms. Warden

   

 

 

 

3,674,895

 

   

(a) Comprised of a February RPSR grant which assumes a 200% maximum payout and an April RPSR grant which assumes a 150% maximum payout. These grants are disclosed in the Grants of Plan-Based Awards Table on page 52.

 

(4) These amounts were paid pursuant to the Company’s AIP. Includes amounts deferred under the qualified savings and nonqualified deferred compensation plans.

 

(5) These amounts relate solely to the increased present value of the NEO’s pension plan benefits using mandatory SEC assumptions (see the descriptions of these plans under the Pension Benefits table on page 56). The amount accrued in each year differs from the amount accrued in prior years due to an increase in age, service and pay (salary and bonus).

The aggregate change in actuarial present value of accumulated benefits is a negative amount for Ms. Flach (-$5,874,072) due to her attainment of an early retirement milestone, which eliminates double counting of benefits in the Northrop Grumman

 

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 COMPENSATION TABLES  |  SUMMARY COMPENSATION TABLE

 

 

Electronic Systems Executive Pension Plan (ESEPP) and Officers Supplemental Executive Retirement Program (OSERP) that had been required by SEC guidance. In accordance with SEC rules, this negative amount is reported as $0 in the above table.

Mr. Bedingfield was hired after the Company’s defined benefit pension plans were closed to new entrants and as a result he does not participate in any defined benefit pension plans.

There were no above-market earnings in the nonqualified deferred compensation plans (see the descriptions of these plans under the Nonqualified Deferred Compensation table on page 60).

 

(6) Amounts include, as applicable, (a) the value of perquisites and personal benefits, (b) basic life insurance premiums, (c) matching contributions through the Northrop Grumman Foundation made to eligible educational institutions and to disaster relief organizations during qualifying disasters, and to non-profit organizations under a Company program, (d) Company contributions to defined contribution and deferred compensation plans (the Northrop Grumman Savings Plan, the Savings Excess Plan and the Officers Retirement Account Contribution Plan), and (e) with respect to Mr. Bedingfield, a gross-up of $1,042 to cover costs incurred as a result of an administrative error by the Company. Where the value of the items reported in a particular category for a NEO exceeded $10,000 in 2017 (other than perquisites and personal benefits, which are subject to different thresholds as described below), those items are identified and quantified below.

Perquisites and Personal Benefits - Perquisites and other personal benefits provided to certain NEOs are as follows: security, travel-related perquisites, including use of Company aircraft or ground transportation services for personal travel (including travel and incidental expenses for family members accompanying the NEO while on travel), financial planning/income tax preparation services, insurance premiums paid by the Company on the NEO’s behalf, executive physicals and other nominal perquisites or personal benefits.

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 2017, except for the following:

 

  i. Mr. Bush: costs attributable to security protection ($399,545), which includes personal travel on Company aircraft consistent with the Company’s security program ($172,353),

 

  ii. Mr. Bedingfield: costs attributable to security protection ($61,657) and

 

  iii. Mr. Pamiljans: relocation expenses ($850,000), which were in lieu of all benefits he would have been entitled to receive under the Company’s relocation policy.

The amount of security costs reported for Mr. Bush has been reduced by $72,719, which reflects the portion of the security perquisite that Mr. Bush reimbursed to the Company for himself and his family related to personal travel on the corporate aircraft ($37,557) and other transportation ($35,162).

Security Protection - As discussed in “Key Components - Security Arrangements,” the Company provides NEOs with certain residential and travel 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 travel security that we treat 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 here 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.

Use of Company Aircraft - 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.

 

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 COMPENSATION TABLES  |  SUMMARY COMPENSATION TABLE

 

 

Contributions to Plans - In 2017, we made the following contributions to Northrop Grumman defined contribution and deferred compensation plans (the Northrop Grumman Savings Plan, the Savings Excess Plan and the Officers Retirement Account Contribution Plan):

 

 Name  

Company Contributions

($)

               

 

Mr. Bush

   

 

 

 

476,398

 

            

               

 

Mr. Bedingfield

   

 

 

 

242,663

 

               

 

Ms. Flach

   

 

 

 

162,296

 

               

 

Mr. Pamiljans

   

 

 

 

55,762

 

               

 

Ms. Warden

   

 

 

 

166,329

 

                                 

 

 (7) Ms. Flach retired from the Company on December 31, 2017.

 

 (8) Mr. Pamiljans was not an NEO for 2016 and 2015; therefore, data for these years is not reflected.

 

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 COMPENSATION TABLES  |  GRANTS OF PLAN-BASED AWARDS TABLE

 

 

 2017 Grants of Plan-Based Awards

 

           

 

 

 

Estimated Future Payouts Under
Non-Equity  Incentive
Plan Awards (1)

 

 

 

 

 

 

Estimated Future Payouts
Under Equity Incentive
Plan Awards (2)

 

 

All Other
Stock
Awards:
Number of
Shares of
Stock or
Units (3)
(#)

 

Grant 

Date Fair 

Value of 

Stock 
Awards (4) 

($) 

  Name

 

 

Grant Type

 

 

Grant Date

 

 

Threshold
($)

 

 

Target
($)

 

 

Maximum
($)

 

 

Threshold
(#)

 

 

Target
(#)

 

 

Maximum
(#)

 

   

Wesley G. Bush

 

 

Incentive Plan

 

   

 

 

 

 

2,795,400

 

 

 

5,590,800

 

         
 

 

RPSR

 

 

 

2/17/2017

 

       

 

 

 

 

30,504

 

 

 

45,756

 

   

 

7,000,058

 

 

 

RSR

 

 

 

2/17/2017

 

                         

 

12,756

 

 

 

2,999,911

 

Kenneth L. Bedingfield

 

 

Incentive Plan

 

   

 

 

 

 

795,000

 

 

 

1,590,000

 

         
 

 

RPSR

 

 

 

2/17/2017

 

       

 

 

 

 

9,914

 

 

 

14,871

 

   

 

2,275,064

 

 

 

RSR

 

 

 

2/17/2017

 

                         

 

4,146

 

 

 

975,042

 

Gloria A. Flach

 

 

Incentive Plan

 

   

 

 

 

 

810,000

 

 

 

1,620,000

 

         
 

 

RPSR

 

 

 

2/17/2017

 

       

 

 

 

 

10,676

 

 

 

16,014

 

   

 

2,449,930

 

 

 

RSR

 

 

 

2/17/2017

 

                         

 

4,465

 

 

 

1,050,063

 

Janis G. Pamiljans

 

 

Incentive Plan

 

   

 

 

 

 

659,263

 

 

 

1,318,526

 

         
 

 

RPSR

 

 

 

2/17/2017

 

       

 

 

 

 

1,786

 

 

 

3,572

 

   

 

420,025

 

 

 

RSR

 

 

 

2/17/2017

 

             

 

765

 

 

 

179,910

 

 

 

RPSR

 

 

 

4/1/2017

 

       

 

 

 

 

9,395

 

 

 

14,093

 

   

 

2,029,921

 

 

 

RSR

 

 

 

4/1/2017

 

                         

 

3,789

 

 

 

870,085

 

Kathy J. Warden

 

 

Incentive Plan

 

   

 

 

 

 

810,000

 

 

 

1,620,000

 

         
 

 

RPSR

 

 

 

2/17/2017

 

       

 

 

 

 

10,676

 

 

 

16,014

 

   

 

2,449,930

 

 

 

RSR

 

 

 

2/17/2017

 

                         

 

4,465

 

 

 

1,050,063

 

 

(1) Represents the potential range of payouts under the Company’s AIP. Actual payouts are shown in the Summary Compensation Table column entitled “Non-Equity Incentive Plan Compensation” on page 49.

 

(2) These amounts relate to RPSRs granted in 2017 under the 2011 Plan. Each RPSR represents the right to receive a share of the Company’s common stock upon vesting. Earned RPSRs may be paid in shares, cash or a combination of shares and cash at the Compensation Committee’s discretion. Dividend equivalents accrue on RPSR awards earned and will be paid upon distribution of the RPSRs.

For NEOs who were elected officers at the time of grant, RPSRs are earned based on relative TSR and the achievement of Cumulative FCF* targets over a three-year performance period commencing January 1, 2017 and ending December 31, 2019. The payout will occur in early 2020 and will range from 0% to 150% of the rights awarded.

The RPSRs granted to Mr. Pamiljans in February 2017 while he was serving as an appointed officer are earned based on the achievement of metric targets weighted 50% to pension-adjusted return on net assets and 50% to Cumulative FCF* over a three-year performance period. The payout will occur in early 2020 and will range from 0% to 200% of the rights awarded.

An executive must remain employed through the performance period to earn an award, although prorated vesting results if employment terminates earlier due to early retirement, death or disability. The award will fully vest if the executive terminates due to a change in control qualifying termination or normal retirement (mandatory at age 65). See the Termination Payments and Benefits section for treatment of RPSRs in these situations and upon a change in control.

 

(3) These amounts relate to RSRs granted in 2017 under the 2011 Plan. Each RSR represents the right to receive a share of the Company’s common stock upon vesting. Earned RSRs may be paid in shares, cash or a combination of shares and cash at the Compensation Committee’s discretion. Dividend equivalents accrue on RSR awards earned and will be paid upon distribution of the RSRs.

 

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Table of Contents

 

 COMPENSATION TABLES  |  GRANTS OF PLAN-BASED AWARDS TABLE

 

 

RSRs generally vest three years from the date of grant. An executive must remain employed through the vesting period to earn an award, although full vesting results if employment terminates earlier due to death, disability, a change in control qualifying termination or normal retirement (mandatory at age 65). The award is prorated if the executive terminates due to early retirement. See the Termination Payments and Benefits section for treatment of RSRs in these situations and upon a change in control.

The RSRs granted to Mr. Pamiljans in April 2017 in connection with his promotion vest one year from the date of grant on April 1, 2018. Mr. Pamiljans must remain employed through the vesting period to earn the award, although full vesting will result if his employment terminates earlier due to death, disability or a change in control qualifying termination.

 

(4) The fair value of awards was computed in accordance with FASB ASC Topic 718 disregarding potential forfeitures.

 

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Table of Contents

 

 COMPENSATION TABLES  |  OUTSTANDING EQUITY AWARDS TABLE

 

 

 Outstanding Equity Awards at 2017 Fiscal Year End

 

  Name

 

  

Grant Date

 

    

Number of
Shares or Units of
Stock that Have
Not Vested (1)
(#)

 

  

Market Value of
Shares or Units of
Stock that Have  Not
Vested (2)
($)

 

  

 

Equity Incentive
Plan Awards:
Number of
Unearned
Shares,
Units or Other
Rights that Have
Not Vested (3)
(#)

 

  

        Equity Incentive         
Plan Awards:
Market or Payout
Value of Unearned
Shares, Units or Other
Rights that
Have Not Vested (2)
($)

 

Wesley G. Bush

  

 

 

 

 

2/17/2017

 

 

 

 

  

 

12,756

 

  

 

3,914,944

 

  

 

30,504

 

  

 

9,361,983

 

  

 

 

 

 

2/17/2016

 

 

 

 

  

 

16,478

 

  

 

5,057,263

 

  

 

36,316

 

  

 

11,145,744

 

  

 

 

 

 

2/18/2015

 

 

 

 

  

 

16,745

 

  

 

5,139,208

 

  

 

41,147

 

  

 

12,628,426

 

Kenneth L. Bedingfield

  

 

 

 

 

2/17/2017

 

 

 

 

  

 

4,146

 

  

 

1,272,449

 

  

 

9,914

 

  

 

3,042,706

 

  

 

 

 

 

2/17/2016

 

 

 

 

  

 

4,943

 

  

 

1,517,056

 

  

 

10,895

 

  

 

3,343,784

 

  

 

 

 

 

2/18/2015

 

 

 

 

  

 

5,582

 

  

 

1,713,172

 

  

 

11,837

 

  

 

3,632,894

 

Gloria A. Flach (4)

  

 

 

 

 

2/17/2017

 

 

 

 

  

 

4,465

 

  

 

1,370,353

 

  

 

10,676

 

  

 

3,276,571

 

  

 

 

 

 

2/17/2016

 

 

 

 

  

 

5,767

 

  

 

1,769,950

 

  

 

12,710

 

  

 

3,900,826

 

  

 

 

 

 

2/18/2015

 

 

 

 

  

 

6,512

 

  

 

1,998,598

 

  

 

13,810

 

  

 

4,238,427

 

Janis G. Pamiljans

  

 

 

 

 

4/1/2017

 

 

 

 

  

 

3,789

 

  

 

1,162,882

 

  

 

9,395

 

  

 

2,883,419

 

  

 

 

 

 

2/17/2017

 

 

 

 

  

 

765

 

  

 

234,786

 

  

 

1,786

 

  

 

548,141

 

  

 

 

 

 

2/17/2016

 

 

 

 

  

 

2,362

 

  

 

724,921

 

  

 

2,307

 

  

 

708,041

 

  

 

 

 

 

2/18/2015

 

 

 

 

  

 

987

 

  

 

302,920

 

  

 

2,302

 

  

 

706,507

 

Kathy J. Warden

  

 

 

 

 

2/17/2017

 

 

 

 

  

 

4,465

 

  

 

1,370,353

 

  

 

10,676

 

  

 

3,276,571

 

  

 

 

 

 

2/17/2016

 

 

 

 

  

 

5,767

 

  

 

1,769,950

 

  

 

12,710

 

  

 

3,900,826

 

  

 

 

 

 

2/18/2015

 

 

 

 

  

 

5,954

 

  

 

1,827,342

 

  

 

12,626

 

  

 

3,875,046

 

 

(1) Outstanding RSRs generally vest three years from date of grant. Mr. Pamiljans’ April 1, 2017 RSR promotion grant vests on April 1, 2018. Mr. Pamiljans’ February 17, 2016 RSR grant is comprised of an annual grant (989 shares) and a retention grant (1,373 shares) and vests on February 17, 2018.

 

(2) The value listed is based on the closing price of the Company’s stock of $306.91 on December 29, 2017, the last trading day of the year.

 

(3) Outstanding RPSRs granted in 2017, 2016 and 2015 generally vest based on performance for the three-year performance period ending on December 31, 2019, 2018 and 2017, respectively. Mr. Pamiljans’ 2016 RPSR grant vests based on performance for the 2015-2017 performance period ending on December 31, 2017. All RPSR grants are subject to the Compensation Committee’s approval of the performance-based earnout percentage applicable to the grant following the end of the performance period. The 2015 RPSRs and Mr. Pamiljans’ 2016 RPSRs were distributed in February 2018 upon the Compensation Committee’s approval. Mr. Pamiljans was an appointed officer at the time his 2015 and 2016 RPSRs were granted and his payout reflects the performance-based earnout percentage applicable to awards for appointed officers. The actual number of shares distributed to the NEOs in February 2018 as a result of the vesting RPSRs was as follows:

 

 

  Name

 

 

 

Actual Shares Distributed                

(#)                

 

   

 

Mr. Bush

 

   

 

 

 

 

61,721                

 

 

 

 

 

Mr. Bedingfield

 

   

 

 

 

 

17,756                

 

 

 

 

 

Ms. Flach

 

   

 

 

 

 

20,715                

 

 

 

 

 

Mr. Pamiljans

 

   

 

 

 

 

6,038                

 

 

 

 

 

Ms. Warden

 

   

 

 

 

 

18,939                

 

 

 

 

 

(4) Ms. Flach retired from the Company on December 31, 2017. In accordance with the retirement-related provisions established at the time of grant, a prorated portion of the outstanding grants above will be paid out based on the number of days in the applicable vesting period that Ms. Flach was employed with the Company. Ms. Flach’s prorated RPSRs will be distributed following the applicable performance period and subject to the performance factor. Because Ms. Flach qualifies as a “specified employee” for purposes of Section 409A of the Internal Revenue Code, her prorated RSRs will be distributed six months from the date of her retirement.

 

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Table of Contents

 

 COMPENSATION TABLES  |  STOCK VESTED TABLE

 

 

2017 Stock Vested

 

    

 

Stock Awards (1) (2)

 

  Name

 

  

 

Number of Shares Acquired
on Vesting
(#)

 

  

 

Value Realized on Vesting        

($)        

 

 

Wesley G. Bush

 

  

 

103,173

 

  

 

25,130,821        

 

 

Kenneth L. Bedingfield

 

  

 

7,601

 

  

 

1,851,435        

 

 

Gloria A. Flach

 

  

 

40,123

 

  

 

9,773,277        

 

 

Janis G. Pamiljans

 

  

 

5,637

 

  

 

1,373,143        

 

 

Kathy J. Warden

 

  

 

34,391

 

  

 

8,376,940        

 

 

(1) Number of shares and amounts reflected in the table are reported on an aggregate basis and do not reflect shares sold or withheld to pay withholding taxes.

 

(2) Consists of RSRs and RPSRs granted in 2014. The 2014 RSRs vested three years from the date of grant and the 2014 RPSRs vested based on the three-year performance period ended on December 31, 2016 and were distributed in February 2017.

 

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Table of Contents

 

 COMPENSATION TABLES  |  PENSION BENEFITS

 

 

 2017 Pension Benefits

 

The following table provides information about the pension plans in which the NEOs participate (described in more detail on the following pages), including the present value of each NEO’s accumulated benefits as of December 31, 2017, calculated pursuant to SEC specifications for this table. 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 (1)

 

 

 

Plan Name

 

    

 

Number of Years
Credited Service (2)
(#)

 

    

 

Present Value of
Accumulated
Benefit (3)
($)

 

    

 

Payments
    During Last    
Fiscal Year
($)

 

Wesley G. Bush

 

 

Pension Plan

 

    

 

15.00

 

    

 

816,937

 

    

 

 

 

 

S&MS Pension Plan

 

    

 

15.67

 

    

 

733,725

 

    

 

 

 

 

ERISA 2

 

    

 

15.00

 

    

 

15,035,377

 

    

 

 

 

 

SRIP

 

    

 

15.67

 

    

 

13,986,129

 

    

 

 

 

 

OSERP

 

    

 

27.67

 

    

 

8,712,894

 

    

 

 

Gloria A. Flach

 

 

Pension Plan

 

    

 

36.39

 

    

 

1,377,858

 

    

 

 

 

 

ERISA 2

 

    

 

14.50

 

    

 

2,225,301

 

    

 

 

 

 

OSERP

 

    

 

33.42

 

    

 

2,279,385

 

    

 

 

 

 

ESEPP

 

    

 

33.39

 

    

 

6,843,298

 

    

 

 

Janis G. Pamiljans

 

 

Pension Plan

 

    

 

31.00

 

    

 

1,924,666

 

    

 

 

 

 

ERISA 2

 

    

 

31.00

 

    

 

3,430,836

 

    

 

 

 

 

OSERP

 

    

 

28.00

 

    

 

82,209

 

    

 

 

 

Kathy J. Warden

 

 

 

OSERP II

 

    

 

9.33

 

    

 

1,453,584

 

    

 

 

 

(1) Mr. Bedingfield was hired after the Company’s defined benefit pension plans were closed to new entrants and as a result he does not participate in any defined benefit pension plans.

 

(2) Each NEO’s credited service under OSERP and ESEPP is less than his or her actual service because credited service under these plans stopped as of December 31, 2014. In addition, Mr. Bush’s credited service under his other plans is less because of his transfers among those plans due to Company acquisitions. Ms. Flach’s credited service under her other plans is less due to a period of employment before plan eligibility commenced. Each NEO’s actual service is as follows: Mr. Bush: 30.67; Ms. Flach: 37.58; Mr. Pamiljans: 30.92; Ms. Warden: 9.33.