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(Item No. 4 on the Proxy Card)

On March 29, 2017, our Board, on the recommendation of the MDCC and subject to shareholder approval, adopted the Raytheon 2017 Incentive Plan (Incentive Plan) so that the payment of certain incentive awards may be deductible as "qualified performance-based compensation" under Section 162(m) of the Internal Revenue Code (Section 162(m)).

IRC Section 162(m). In general, Section 162(m) places a limit on the deductibility for federal income tax purposes of the compensation paid to a company's Chief Executive Officer or any of its three other most highly compensated executive officers (other than its Chief Financial Officer). Under Section 162(m), compensation paid to such individuals in excess of $1 million in a taxable year generally is not tax deductible. However, compensation that qualifies as "performance-based" under Section 162(m) does not count against the $1 million limitation and is tax deductible. One of the requirements of "performance-based" compensation is that the company must disclose the material terms of the plan under which compensation may be paid, and those terms must be approved by the company's shareholders. For purposes of Section 162(m), the material terms include (a) the employees eligible to receive compensation, (b) a description of the business criteria on which the performance goal is based, and (c) the maximum amount of compensation that can be paid to an employee under the performance goal. Each of these aspects of the Incentive Plan is discussed below. Shareholder approval of this proposal will be deemed to constitute approval of each of these aspects of the Incentive Plan for purposes of the approval requirements of Section 162(m).

Currently, payments of our RBI annual cash incentive awards and certain restricted stock and restricted stock unit awards may be subject to the limitations of Section 162(m). We are submitting the Incentive Plan for shareholder approval with the intent to permit deductibility of compensation without unduly restricting the MDCC's flexibility and discretion to administer Raytheon's executive compensation program in a manner designed to meet the objectives of the program. Subject to the terms and conditions of the Incentive Plan, at this time the MDCC intends to structure RBI awards and restricted stock and restricted stock unit awards in substantially the same manner as it currently does under our executive compensation program. If approved by our shareholders, the Incentive Plan will be implemented for fiscal year 2018.

The principal features of the Incentive Plan are summarized below. This summary does not contain all information about the Incentive Plan. A copy of the complete text of the Incentive Plan is attached as Appendix A, and the following description is qualified in its entirety by reference to that text.


Purpose. The primary purpose of the Incentive Plan is to promote the interests of Raytheon and our shareholders by establishing a compensation program to provide selected employees with the opportunity to earn incentive awards that are tied to the achievement of specific performance objectives and that are intended to qualify as performance-based compensation for purposes of Section 162(m).

Administration. The MDCC is responsible for administering the Incentive Plan. Each member of the MDCC is an "outside director" as defined for purposes of Section 162(m).

Eligibility and Participation. Executive officers and other key executives of Raytheon or its affiliates who, in the opinion of the MDCC, are responsible for the continued growth and development and future financial success of the business will be eligible to participate in the Incentive Plan. The approximate number of employees who are currently eligible to participate in the Incentive Plan is 14.

Performance-Based Compensation. The performance goal for each performance period requires positive Adjusted Operating Income. The maximum award that a participant may be paid under the Incentive Plan for the performance period is expressed as a percentage of Adjusted Operating Income. This percentage is 0.75% for our Chief Executive Officer and 0.35% for each of the other participants. The performance period is the period of time established by the MDCC during which performance is measured to determine the level of attainment of an award.

For purposes of the Incentive Plan, Adjusted Operating Income means Raytheon's operating income as reported in its income statement for the applicable performance period, adjusted to eliminate the effects of (a) the FAS/CAS Adjustment (as defined below), (b) changes in law applicable to Raytheon or any of its affiliates measured based on the effect of the changes on revenue, income, assets and liabilities demonstrably caused by such changes in law, (c) changes in accounting principles, including any related accounting restatements, and (d) amounts related to (i) exit or disposal of a business, (ii) losses or expenses of any acquisition or divestiture, including charges related to transition, integration and alignment costs and employee equity-based or other employee retention awards granted in connection with an acquisition, (iii) losses or expenses of any sale, disposal or similar transaction relating to the interest of Raytheon or its affiliates in a joint venture, partnership, portfolio company or similar arrangement, (iv) the impairment or disposal of long-lived assets or the impairment of goodwill and other intangible assets, (v) litigation and regulatory judgments, charges or settlements and any accruals or reserves relating to litigation or regulatory matters, (vi) the impact of charges relating to pre-payment or other early retirement of borrowings, and (vii) other items that are categorized as unusual in nature or infrequently occurring, each as determined in accordance with generally accepted accounting principles and identified in the financial statements, notes to the financial statements, or management's discussion and analysis. Despite the foregoing, an adjustment will be made for items (b) through (d) above only if the net effect of such items, in the aggregate, would change operating income by at least 5%. The FAS/CAS Adjustment is the difference between pension expense or income under Financial Accounting Standards (FAS) requirements and pension expense under the Cost Accounting Standards (CAS).

After the end of each performance period, the MDCC will determine and certify in writing the amount to be awarded to each covered employee in accordance with the limitations established by the Incentive Plan. The MDCC may determine it is appropriate to pay less than the maximum award amount to a participant, but not more. Subject to the maximum award described above, actual award amounts will be based on Raytheon and individual performance and competitive pay levels as determined by the MDCC.

Payment of Awards. All awards will be paid (i) in cash, (ii) in the form of an award of Raytheon common stock, restricted common stock or restricted stock units covering shares of Raytheon common stock, or (iii) in any combination of cash, stock, restricted stock, or restricted stock units as determined by the MDCC in its sole discretion, at such times and on such terms as are determined by the MDCC. Any stock or stock-based awards will be issued or granted under the Raytheon 2010 Stock Plan and any successor stock plan adopted by Raytheon. Where an award is to be paid in the form of equity, the number of shares subject to the award will be determined by reference to the grant date fair value of the award as determined for financial reporting purposes.

Participants will be permitted to defer payment of all or a portion of their awards in accordance with the terms of any deferred compensation plan of Raytheon.

Termination and Amendment. The Incentive Plan will remain in effect until it is terminated by the MDCC. Before that date, the MDCC may amend the Incentive Plan at any time, subject to shareholder approval (if any) required under applicable law, including the rules of any stock exchange on which Raytheon's common stock is listed.

Award Amounts. The benefits or amounts that will be received in the future under the Incentive Plan by or allocated to each of the officers listed in the Summary Compensation Table or all executive officers of Raytheon as a group or any other employees are not determinable. The MDCC has the discretion to determine amounts payable to participants in the Incentive Plan. Non-employee directors will not participate in the Incentive Plan.

Clawback Policy. Awards under the Incentive Plan will be subject to the Company's Clawback Policy.

The Board unanimously recommends a vote "FOR" the approval of the Raytheon 2017 Incentive Plan for IRC Section 162(m) purposes. Proxies solicited by the Board will be so voted unless shareholders specify otherwise in their proxies.


The following table provides information about our equity compensation plans that authorize the issuance of shares of our common stock. This information is provided as of December 31, 2016.

Plan Category (A)
Number of securities to be issued upon exercise of outstanding options, warrants and rights(1)
Weighted average exercise price of outstanding options, warrants and rights(2)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A)
Equity compensation plans approved by stockholders 1,566,115 $ — 6,728,759
Equity compensation plans not approved by stockholders
Total 1,566,115 $ — 6,728,759

(1) This amount includes 1,008,946 shares, which is the aggregate of the actual number of shares that will be issued pursuant to the 2014-2016 LTPP awards and the maximum number of shares that may be issued upon settlement of outstanding 2015-2017 and 2016-2018 LTPP awards, including estimated dividend equivalent amounts. The shares to be issued pursuant to the 2014-2016, 2015-2017 and 2016-2018 LTPP awards will be issued under the Raytheon 2010 Stock Plan. These awards, which are granted as RSUs, may be settled in cash or in stock at the discretion of the MDCC. This amount also includes 557,169 shares that may be issued upon settlement of other RSUs, generally issued to retirement-eligible and non-U.S. employees. The shares to be issued in settlement of these RSUs will be issued under the 2010 Stock Plan. The RSUs generally vest one-third per year on the second, third and fourth anniversaries of the date of grant.

(2) Since RSU awards do not have an exercise price, and there are no other options, warrants or rights outstanding at December 31, 2016, the weighted-average exercise price is zero.

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