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COMPENSATION DISCUSSION AND ANALYSIS
EXECUTIVE SUMMARY


2016 NAMED EXECUTIVE OFFICERS (NEOS)

 
THOMAS A. KENNEDY
Chairman and Chief Executive Officer
 
ANTHONY F. O’BRIEN
Vice President and Chief Financial Officer
 
DAVID C. WAJSGRAS
Vice President, and President of our Intelligence, Information and Services (IIS) business
 
RICHARD R. YUSE
Vice President, and President of our Space and Airborne Systems (SAS) business
 
TAYLOR W. LAWRENCE
Vice President, and President of our Missile Systems (MS) business

OUR COMPENSATION OBJECTIVES

Our executive compensation program is designed to:

  • Retain and attract highly-qualified executives
  • Motivate our executives to achieve our overall business objectives
  • Reward individual performance
  • Align our executives’ interests with those of our shareholders


ELEMENTS OF OUR COMPENSATION PROGRAM

Our program consists primarily of the following three direct compensation elements:

COMPENSATION ELEMENT AND TYPE OF COMPENSATION KEY OBJECTIVES
Base Salary
  • Fixed
  • Annual cash
  • To provide a base level of cash compensation that is competitive and reflects an executive’s experience and scope of responsibilities
Annual Incentive Awards

Results-Based Incentive (RBI)
  • Variable, at risk
  • Annual cash
  • To motivate and reward executives based on their performance in achieving annual Raytheon and individual goals and to align short-term executive pay with performance
Long-Term Incentive Equity Awards

Restricted Stock
  • Variable, equity (typically 4-year vesting)
Long-Term Performance Plan (LTPP) units
  • Variable, equity (3-year performance)
  • To motivate and reward executives based on Raytheon performance and value delivered to Raytheon shareholders through stock price appreciation
  • To retain highly-qualified executives
  • To align long-term executive pay with performance
  • To align executives’ interests with those of Raytheon shareholders

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 42. To reinforce the link with shareholders’ interests, we require our executives to own a meaningful amount of stock.


OUR 2016 PERFORMANCE

In 2016, Raytheon continued to execute its growth strategy and deliver strong program performance while also maintaining strong operating margins. Our global team built upon Raytheon’s return to growth in 2015, driven by increases in both domestic and international sales. 2016 was the 13th consecutive year of international sales growth, which reflects the continued successful evolution and execution of our international strategy. Highlights of our 2016 performance include:

Record bookings of $27.8 billion for the year; book-to-bill ratio of 1.16 for the year
Full-year net sales of $24.1 billion, up 3.5% for the year, Raytheon’s best growth rate since 2009
Full-year EPS from continuing operations of $7.44
Strong operating cash flow from continuing operations of $2.9 billion for the year, after a $500 million pretax discretionary pension plan contribution in the fourth quarter
Continued strong growth in Raytheon’s bookings, which increased by 10% over the prior year
Particularly strong and broad-based domestic bookings, rising 18% over the prior year
2016 total shareholder return of 16.9%

These achievements led us to exceed our 2016 targets on three out of four RBI metrics and all LTPP metrics, resulting in the funding levels shown below.

2016 RBI
Dials show results as a percentage of target.

Bookings Weighting: 20%
Net Sales Weighting: 30%
Free Cash Flow (FCF) Weighting: 20%
Operating Income From Continuing Operations Weighting: 30%
We exceeded our 2016 targets on three out of four RBI metrics, resulting in an overall funding level of 105.6% of target.

For complete information, see “Executive Compensation in 2016 — Annual Cash Incentives — RBI” on page 36.


2014 – 2016 LTPP
Dials show LTPP Funding.

Average Return On Invested Capital (ROIC) Weighting: 50%
Cumulative FCF (CFCF) Weighting: 25%
Total Shareholder Return (TSR) Weighting: 25%
We exceeded our three-year targets on all LTPP metrics, resulting in a payout equal to 145.8% of target.

For complete information, see “Executive Compensation in 2016 — Long-Term Equity Incentives — LTPP and Restricted Stock” on page 40.

2016 TOTAL DIRECT COMPENSATION

The table below shows the base salary earned, annual cash incentive paid, and equity awards granted to our NEOs for 2014-2016 for Messrs. Kennedy, Wajsgras and Yuse; and for 2015-2016 for Messrs. O’Brien and Lawrence, who became NEOs in 2015. This supplemental information is not a substitute for the information appearing in the Summary Compensation Table on page 47.

Annual Cash Incentive Long-Term Equity Incentives*
NEO Year Salary RBI LTPP Restricted Stock Total
Thomas A. Kennedy 2016 $1,299,979 $2,938,400 $5,000,028 $3,899,980 $13,138,387
Thomas A. Kennedy 2015 1,196,467 3,046,500 4,500,016 3,400,004 12,142,987
Thomas A. Kennedy 2014 1,057,698 2,500,000 4,000,034 2,999,961 10,557,693
Anthony F. O’Brien 2016 $608,510 $734,400 $1,199,945 $1,100,001 $3,642,856
Anthony F. O’Brien 2015 485,686 608,400 1,000,027 800,033 2,894,146
David C. Wajsgras 2016 $971,943 $1,052,500 $1,250,007 $1,300,035 $4,574,485
David C. Wajsgras 2015 952,887 1,114,400 1,250,034 1,300,040 4,617,361
David C. Wajsgras 2014 929,694 1,100,000 1,300,032 1,549,968 4,879,694
Richard R. Yuse 2016 $792,506 $997,900 $1,250,007 $1,300,035 $4,340,448
Richard R. Yuse 2015 747,763 887,100 1,250,034 1,300,040 4,184,937
Richard R. Yuse 2014 678,268 800,000 1,250,016 1,600,006 4,328,290
Taylor W. Lawrence 2016 $728,151 $817,900 $1,250,007 $1,300,035 $4,096,093
Taylor W. Lawrence 2015 693,474 810,900 1,250,034 1,300,040 4,054,448

* 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 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.

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