COMPENSATION DISCUSSION AND ANALYSISEXECUTIVE SUMMARY2018 NAMED EXECUTIVE OFFICERS (NEOs) ANTHONY F. O’BRIEN
Vice President and
Chief Financial Officer
TAYLOR W.
Former Vice
President, and
Former President
of our Missile
Systems (MS)
business
DAVID C. WAJSGRAS
Vice President,
and President of
our Intelligence,
Information and
Services (IIS)
business
WESLEY D.
Vice President,
and President of
our MS business
RICHARD R.
Former Vice
President, and
Former President
of our Space and
Airborne Systems
(SAS) business
(1) Mr. Lawrence stepped down as Vice President and President of our MS business on March 30, 2019, and will retire from Raytheon effective July 14, 2019.
(2) Mr. Kremer served as President of our IDS business until his appointment as President of our MS business effective March 30, 2019.
(3) Mr. Yuse retired from Raytheon effective December 31, 2018.
OUR COMPENSATION OBJECTIVES Our executive compensation program is designed to:
ELEMENTS OF OUR COMPENSATION PROGRAM Our program consists primarily of three direct compensation elements.
Our executives’ total direct compensation reflects a mix of these three elements that meets our compensation objectives. These direct compensation elements are rounded out with certain perquisites and other executive benefits. See “Perquisites and Other Executive Benefits” on page 54. To reinforce the link with shareholders’ interests, we require our executives to own a meaningful amount of stock. See “Stock Ownership and Retention Guidelines” on page 57. COMPANY PERFORMANCE AND COMPENSATION OUTCOMES Raytheon performed well in 2018. Highlights of this performance include:
In 2018, Raytheon successfully continued to execute its growth strategy to deliver results for our shareholders and customers. Our strong execution resulted in several company financial records, including net sales, operating cash flow, bookings and backlog. In particular, Raytheon achieved record classified bookings and sales, which were up 46% and 19%, respectively, for the year. Our classified work generally funds next-generation technology development that is critical to Raytheon’s long-term growth through the creation of future franchise programs (advanced solution sets for which we expect longer-term customer demand) and production awards. To enable this classified business performance, Raytheon has made strategic internal investments over the past few years to ensure our capabilities are aligned with our customer needs. We also continued to expand the international markets for Raytheon solutions, including for our Patriot air and missile defense system franchise. In 2018, Raytheon booked four major Patriot production awards totaling almost $4 billion, including bookings from three new countries: Romania, Poland and Sweden. Raytheon delivered better-than-expected operating cash flow performance in 2018 driven by improved working capital performance. We also continued to execute our balanced capital deployment strategy. In addition to funding strategic internal investments, we increased our dividend by 8.8%, repurchased 6.7 million shares of our common stock for $1.3 billion, and made a $1.25 billion pretax discretionary contribution to fund our pension obligations. In addition, Raytheon continued to invest in employees in 2018. These investments included adjusting our compensation plans based upon market data and to drive continuous financial performance and higher payouts for higher performance impacting almost 38,500 employees, upgrading and building new facilities, continuing to improve employee benefits and granting equity to an expanded employee population at more junior levels. Pay for Performance. Most of our executives’ compensation is at risk and varies based on performance. Due to our strong 2018 financial performance, we exceeded our 2018 RBI targets on all metrics, resulting in a 140.7% funding level.
The 2018 RBI performance targets for all metrics were greater than the comparable 2017 RBI targets. All 2018 RBI targets also exceeded Raytheon’s actual performance for 2017, except for FCF. The 2018 RBI FCF target reflected higher planned investments on capital expenditures, including additional facilities requirements, as well as necessary investments related to recent program wins. 2018 was the fourth consecutive year of accelerated growth for Raytheon and these investments relate to this growth. Our 2018 RBI FCF target also reflected lower planned net cash inflows relating to our pension plans than we had in 2017. Unlike other companies, government contractors such as Raytheon experience not only cash outflows from pension costs, but also cash inflows from the U.S. government through the pricing of our products and services. This decrease in cash from pension from 2017 to 2018 is non-operational and driven by requirements of our pension plans. It should also be noted that our actual 2018 FCF performance exceeded our actual 2017 FCF performance by $472 million. The Company’s strong overall performance over the three-year performance cycle resulted in a 148.0% payout factor for our 2016–2018 LTPP awards.
The results across all 2016–2018 LTPP metrics are indicative of our return to growth in 2015 ahead of schedule, our consistently strong growth rate (particularly in classified programs), and our stronger-than-expected cash flow. We include free cash flow metrics in both the RBI and LTPP programs given the importance of both short-term and long-term cash flow performance to investors. Cash flow directly impacts the health of our balance sheet, which enables us to effectively deploy our capital to support Raytheon’s strategy and generate value to shareholders. Short-term cash flow performance impacts our capital and software expenditures, company and program investments, and discretionary pension contributions. Long-term cash flow is an important metric in determining dividend changes, acquisition capacity and other longer-term investments that span several years. Our RBI and LTPP programs are discussed in more detail in “Annual Cash Incentives — RBI” on page 47 and “Long-Term Performance Plan” on page 52. Shareholder Value. The MDCC believes that executive compensation should be tied to Raytheon performance that drives long-term value creation for our shareholders. Accordingly, our executive compensation program provides executives with a mix of variable, at-risk, short- and long-term incentive opportunities based on a number of key financial metrics. The MDCC believes the selected metrics drive operational and financial performance consistent with our long-term growth strategy, and are strong indicators of our overall performance. In particular, the MDCC believes the RBI program metrics of bookings, net sales, FCF and operating income from continuing operations, which are balanced against the LTPP program metrics of ROIC, CFCF and TSR, have driven strong Raytheon operational results, including Company performance in 2018 and increased shareholder value over the long term. Notwithstanding Raytheon’s financial performance in 2018 and future positioning (given our record backlog and classified bookings growth), Raytheon’s stock performance in 2018 was highly volatile. After reaching an all-time high in April, Raytheon stock, along with the stock of other leading defense companies, experienced a sharp decline in the fourth quarter of 2018. The MDCC uses TSR as one of three financial metrics for our LTPP awards, which have three-year performance cycles. With the impact of the stock performance in 2018, Raytheon’s three-year TSR ranking was seventh out of ten peers under the 2016–2018 LTPP. Over the course of our CEO’s five-year tenure, Raytheon has delivered strong TSR performance on both an absolute basis and relative to our core peer group and the S&P 500 Index. As evidenced by the chart below, Raytheon’s cumulative TSR since 2014 has consistently outperformed the cumulative TSRs of the core peer group median and the S&P 500 Index. Even with its stock performance in the fourth quarter of 2018, Raytheon’s five-year cumulative TSR of 85.3% exceeded the core peer group median of 80.2% and the S&P 500 Index of 48.1%. 5 Year Cumulative Total Shareholder Return
*The Core Peer Group Median does not include Raytheon. 2019 CEO TOTAL TARGET DIRECT COMPENSATION AND MIX As discussed beginning on page 43, the MDCC uses information furnished by its independent compensation consultant to assess the competitive positioning of our executives’ total target direct compensation against the market. The MDCC uses the median for comparable positions as a reference, though it also uses other factors in setting individual target compensation. For our CEO, the MDCC has increased his total target direct compensation each year based on, among other factors, his strong individual performance and significant contribution to Raytheon’s financial performance. However, for 2019, the MDCC has determined that our CEO’s total target direct compensation should remain at the same level as his 2018 compensation in recognition of our 2018 TSR performance and to maintain his compensation at approximately the peer median. CEO Total Target Direct Compensation
* The change to the variance from the median for our CEO’s total target direct compensation in 2019 was driven by a drop in the CEO pay peer median from $14.981 million to $14.088 million, a decrease of $893,000. Further, as discussed on page 52, in 2019, our CEO received a total of $10.5 million in performance-based LTPP awards (at target) and time-based restricted stock awards, the same as in 2018. However, with the MDCC’s decision to shift to a long-term incentive mix of 60% / 40% between performance-based LTPP and time-based restricted stock, our CEO’s 2019 performance-based LTPP award (at target) increased by $500,000 and his 2019 time-based restricted stock award decreased by $500,000. 2018 CEO Long-Term Equity Incentive Mix
2019 CEO Long-Term Equity Incentive Mix
The MDCC believes that the CEO’s 2019 total target direct compensation opportunities reflect an appropriate mix of incentives to continue to drive Raytheon’s long-term performance, and are aligned with the interests of Raytheon shareholders. SHAREHOLDER OUTREACH AND COMPENSATION PROGRAM CHANGES Raytheon regularly engages with our shareholders to solicit their views on, among other important topics, our executive compensation program. We have conducted formal engagements annually since 2010, and the MDCC has incorporated feedback from this outreach and other communications into numerous aspects of our executive compensation program, including design elements and metrics. Recent Shareholder Feedback. In the fall of 2018, we communicated with 30 institutional shareholders owning approximately 38% of Raytheon’s outstanding shares. Overall, institutional shareholders spoke favorably about our compensation program, and when asked to discuss areas for potential improvements, some shareholders expressed the following:
How We Responded. The MDCC considered these points and other feedback and consulted with its independent compensation consultant and management. After careful deliberation, the following changes were implemented. 2019 EXECUTIVE COMPENSATION PROGRAM AND DISCLOSURE CHANGES
Beginning in 2019, the MDCC increased the weight
of executive performance-based LTPP awards for
a long-term incentive mix of 60% LTPP / 40% time-based
restricted stock. This change to mix affects
all NEOs and other executive officers.
We enhanced our compensation program disclosures regarding
annual RBI and LTPP performance goals (see page 36),
including additional information on period-over-period targets,
the threshold and maximum performance for RBI awards,
and the threshold performance for LTPP awards.
Previous Changes. The MDCC is committed to continuous evaluation of executive compensation program to ensure it
remains appropriate for Raytheon and our strategic, business and financial objectives, and is well aligned with our shareholders’
interests. In 2017 and 2018, the MDCC made the following changes after a comprehensive review by its independent
compensation consultant to ensure the program remains closely aligned with market norms and consistent with best practices.
2017/2018 EXECUTIVE COMPENSATION PROGRAM CHANGES
Implemented “double trigger”
for accelerated vesting of
equity awards following a
change in control (a change
in control followed by an
involuntary termination
without cause or voluntary
departure for good
Added requirement
of restrictive covenant
(including non-competition
and non-solicitation)
compliance for post-employment
LTPP payouts
and severance pay, subject
to applicable
Eliminated car
Adjusted RBI and LTPP
program performance
ranges and pay ranges
to improve pay-for-performance
alignment
and market practice
(1) Beginning with the 2018–2020 LTPP and 2018 annual restricted stock awards, and other equity awards made starting in May 2017.
(2) Beginning with the 2018–2020 LTPP awards and effective July 2017 under the executive severance guidelines approved by the MDCC.
(3) Effective July 2017.
(4) Effective for the 2018 RBI program and the 2018–2020 LTPP awards. See “Company Performance and Compensation Outcomes” on page 35.
In addition to shareholder feedback, the MDCC works closely with its independent compensation consultant and management to consider market trends and best practices, and makes changes to the compensation program as appropriate. EXECUTIVE COMPENSATION PROGRAM BEST PRACTICES Raytheon’s compensation program features the following best practices. WHAT WE DO
WHAT WE DON’T DO
2018 NEO TOTAL DIRECT COMPENSATION The table below shows the base salary earned, annual cash incentive paid, and equity awards granted to our NEOs for 2016–2018. This supplemental information is not a substitute for the information appearing in the Summary Compensation Table on page 59.
(1) The amounts set forth under the Restricted Stock and LTPP Award columns represent the full intrinsic values of such awards on the date the Board or MDCC made
the formal determination for each such grant (e.g., target number of shares times the closing price of our common stock on the determination date), since that is the
basis upon which the MDCC considers these awards in proposing, recommending and approving annual compensation. In contrast, the Stock Awards column in the
Summary Compensation Table represents the grant date fair value of such awards for financial statement reporting purposes.
(2) Mr. Lawrence stepped down as an executive officer on March 30, 2019, and will retire from Raytheon effective July 14, 2019. Mr. Yuse retired from Raytheon
effective December 31, 2018.
(3) Mr. Kremer did not become an NEO until 2018.
(4) Amounts represent lump-sum payments to Messrs. Wajsgras and Yuse in lieu of base salary merit increases.
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