DEF 14A 1 c90207_def14a.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

 

SCHEDULE 14A INFORMATION

 

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Securities Exchange Act of 1934

(Amendment No.    )

 

 

 

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United Technologies Corporation

 

(Name of Registrant as Specified in Its Charter)

 

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Notice of 2018

ANNUAL MEETING
OF SHAREOWNERS

and Proxy Statement

 

COMPANY AWARDS IN 2017

 

Among the World’s Most
Respected Companies

– Barron’s

 

Among the Best Places
to Work for Latinas

– Latina Style Magazine

 

     

Among the World’s
Greenest Companies

– Newsweek

 

Among the Best Places to Work for
Employment Disability Inclusion

– Disability Equality Index

 

     

Among the Most Admired
Aerospace and Defense Companies

– Fortune

 

Among Noteworthy Companies
for Diversity Practices

– DiversityInc

 

     

Among the Best Places
to Work for LGBTQ

– Human Rights Campaign Foundation
  Corporate Equality Index

 

 

All-America Executive Team:
Most Honored Company in
the Aerospace and Defense
Electronics Sector

– Institutional Investor

     

Rated A- for Companies
Responding to Climate Change

– Carbon Disclosure Project

 

Among the Best Investor Relations
Programs in the Aerospace and
Defense Electronics Sector

– Institutional Investor

 

 
  
  
  
March 19, 2018

 

Notice of 2018 Annual Meeting of Shareowners

 

Meeting Information DATE AND TIME: April 30, 2018 8:00 a.m. Eastern Time (doors open at 7:30 a.m.) LOCATION: UTC Center for Intelligent Buildings 13995 Pasteur Boulevard Palm Beach Gardens, Florida 33418 Your vote is very important. Please submit your proxy or voting instructions as soon as possible.

Agenda

  Election of the Twelve Director Nominees Listed in the Proxy Statement.
  Advisory Vote to Approve Executive Compensation.
  Approve the UTC 2018 Long-Term Incentive Plan.
  Appoint PricewaterhouseCoopers LLP to Serve as Independent Auditor for 2018.
 

Approve an Amendment to the Restated Certificate of Incorporation to Eliminate Supermajority Voting for Certain Business Combinations.

  Consideration of the Shareowner Proposal Set Forth in the Proxy Statement, if Properly Presented.
  Other Business, if Properly Presented.

 

Who may vote:

If you owned shares of UTC Common Stock at the close of business on March 2, 2018, you are entitled to receive this notice of the Annual Meeting and to vote at the meeting, either in person or by proxy.

 

How to attend:

Please request a ticket in advance by following the instructions on page 81.

 

Please review your Proxy Statement and vote in one of the four ways described in the box below.

 

By order of the Board of Directors,

 

Peter J. Graber-Lipperman

Corporate Vice President, Secretary & Associate General Counsel

 

   
 

Please refer to the enclosed proxy materials or the information forwarded by your bank, broker or other holder of record to see which voting methods are available to you.

 

 

 

THE INTERNET

Visit the website on your proxy card.

 

BY TELEPHONE

Call the telephone number on your proxy card.

 

BY MAIL

Sign, date and return your proxy card in the enclosed envelope.

 

IN PERSON

Attend the Annual Meeting in Palm Beach Gardens, Florida. See page 81 for instructions on how to attend.

         

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   i

 

 

 

TABLE OF CONTENTS  

 

Notice of 2018 Annual Meeting of Shareowners   i
     
Proxy Summary   1
     
CORPORATE GOVERNANCE    
     
PROPOSAL 1:
Election of Directors
  6
     
Nominees   9
     
Corporate Governance   16
     
Corporate Responsibility   21
     
Compensation of Directors   25
     
Share Ownership   27
     
EXECUTIVE COMPENSATION    
     
PROPOSAL 2:
Advisory Vote to Approve Executive
Compensation
  29
     
Compensation Discussion and Analysis   30
     
Executive Summary   30
     
How We Make Pay Decisions and
Assess Our Programs
  34
     
Our Principal Elements of Compensation   37
     
CEO Pay Overview   42
     
How We Assess Pay-for-Performance   44
     
Pay Decisions for the Other NEOs   46
     
Other Compensation Elements   50
   
Other Executive Compensation
Policies and Practices
  52
     
Report of the Compensation Committee   53
     
Compensation Tables   54
     
CEO Pay Ratio   66
     
PROPOSAL 3:
Approve the UTC 2018
Long-Term Incentive Plan
  68
AUDIT    
     
Report of the Audit Committee   75
     
PROPOSAL 4:
Appoint PricewaterhouseCoopers LLP to
Serve as Independent Auditor for 2018
  76
     
OTHER PROPOSALS    
     
PROPOSAL 5:
Approve an Amendment to the Restated
Certificate of Incorporation to Eliminate
Supermajority Voting for Certain Business
Combinations
  78
   
PROPOSAL 6:
Shareowner Proposal
  79
     
OTHER SHAREOWNER INFORMATION    
     
Frequently Asked Questions About the
Annual Meeting
  81
     
Other Important Information   86
     
APPENDICES    
     
Appendix A: Reconciliation of Non-GAAP
Measures to Corresponding GAAP Measures
  90
   
Appendix B: Financial Performance Metrics
Used in UTC’s Incentive Compensation Plans
  92
     
Appendix C: UTC 2018 Long-Term Incentive Plan   93
     
Appendix D: Proposed Amendment
to the Corporation’s Restated Certificate
of Incorporation
  104


 

Important Notice Regarding the Availability of Proxy Materials for the Shareowner Annual Meeting to be held on April 30, 2018. This Notice of the 2018 Annual Meeting of Shareowners and Proxy Statement, and UTC’s 2017 Annual Report are both available free of charge at www.proxyvote.com. References in either document to our website are for the convenience of readers, and information available at or through our website is not a part of nor is it incorporated by reference in the Proxy Statement or Annual Report.

 

The Board of Directors of United Technologies Corporation (“UTC,” the “Company” or the “Corporation”) is soliciting proxies to be voted at our 2018 Annual Meeting of Shareowners on April 30, 2018, and at any postponed or reconvened meeting. We expect that this Proxy Statement will be mailed and made available to shareowners beginning on or about March 19, 2018. At the meeting, votes will be taken on the six matters listed in the Notice of Meeting.

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement

 

 

PROXY Summary ANNUAL MEETING AGENDA PROPOSAL 1: Election of Directors PAGES 6-15 BOARD RECOMMENDATION: FOR EACH DIRECTOR NOMINEE PROPOSAL 2: Advisory Vote to Approve Executive Compensation PAGE 29 BOARD RECOMMENDATION: FOR PROPOSAL 3: Approve the UTC 2018 Long-Term Incentive Plan PAGES 68-74 BOARD RECOMMENDATION: FOR PROPOSAL 4: Appoint PricewaterhouseCoopers LLP to Serve as Independent Auditor for 2018 PAGES 76-77 BOARD RECOMMENDATION: FOR PROPOSAL 5: Approve an Amendment to the Restated Certificate of Incorporation PAGE 78 BOARD RECOMMENDATION: FOR PROPOSAL 6: Shareowner Proposal PAGES 79-80 BOARD RECOMMENDATION: AGAINST The summary below highlights selected information in this Proxy Statement. Please review the entire Proxy Statement and UTC’s 2017 Annual Report before voting your shares. 2017 Performance Highlights Our investments in purposeful innovation and our focus on execution, cost reduction and disciplined capital allocation are yielding outstanding results. We delivered solid financial performance in 2017. Sales, adjusted earnings per share (“EPS”) and free cash flow exceeded our expectations. We saw 5% sales growth in 2017, which included organic sales of 4% — our strongest since 2014. Importantly, each of our businesses contributed to this organic sales growth, with Pratt & Whitney leading the charge with sales and organic growth of 9%. Additionally, we made substantial strategic investments and fully funded our U.S. qualified pension plans (as of December 31, 2017). FINANCIAL RESULTS Net Sales (in billions) Diluted Earnings per Share ($ per share) GAAP $59.8 Non-GAAP(1) $60.2 Diluted Earnings per Share ($ per share) $5.70 $6.65 4% organic sales growth GAAP Cash Flow(2) (in billions) Net Income (in billions) $5.6 $4.6 Non-GAAP(1) $3.6 $4.6 $5.3 (1) See Appendix A on pages 90-91 for more information regarding these non-GAAP financial measures. (2) “GAAP cash flow” is cash flow from continuing operations while “Non-GAAP cash flow” is free cash flow. See Appendix A for more information. Strategic and Operational Highlights We announced the proposed acquisition of Rockwell Collins, which upon close (expected in the third quarter of 2018) will merge with our UTC Aerospace Systems (“UTAS”) business to create Collins Aerospace Systems. • UTC Digital Accelerator launched in Brooklyn, New York. • Pratt & Whitney met its 2017 shipment targets for the Geared Turbofan (“GTF”) engine. • Our commercial businesses gained market share and generated solid organic growth. Otis delivered its best year of organic sales growth since 2014. UTC Climate, Controls & Security (“CCS”) generated 6% sales growth, including 4% organic growth, and launched over 100 new products in 2017. Shareowner Returns “Our investments in purposeful innovation and our focus on execution, cost reduction and disciplined capital allocation are yielding outstanding results.” Greg Hayes, Chairman & CEO $2.1 billion dividends paid 19% total shareowner return $1.4 billion share buybacks United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement 1

 

 

  PROXY SUMMARY  

 

 

Governance and Board Highlights

 

UTC is committed to strong corporate governance practices, which the Board believes are critical to achieving long-term shareowner value and which strengthen Board and Management accountability. The following are highlights of our governance framework:

 

INDEPENDENT AND ENGAGED BOARD

92% of our director nominees are independent

 

All standing committees except Finance are comprised entirely of independent directors

 

98% overall attendance by directors at ten Board meetings in 2017

 

99% overall attendance by directors at committee meetings in 2017

 

75% or more of the Board and applicable committee meetings were attended by each director in 2017

 

100% director attendance at the 2017 Annual Meeting

 

PROACTIVE GOVERNANCE IN 2017 

Amended Bylaws to allow shareowner action by special meeting

 

Amended Corporate Governance Guidelines to explicitly provide for annual self-evaluation of individual directors

 

Increased share ownership requirements for CFO and business unit presidents

REFRESHED AND DIVERSE BOARD 

+5 new independent directors since 2016

 

-4 independent directors retired since 2016

 

63% of independent director nominees have served < 9 years

 

45% of independent director nominees are diverse

 

BOARD OVERSIGHT 

Regularly reviews the Company’s strategic direction and priorities

 

Director and CEO succession planning and management development

 

Government relations activities, including those of UTC’s political action committee

 

Regularly monitors significant risks

 

ACCOUNTABLE BOARD 

Annual election of all directors
   
Robust Lead Director role
   
Proxy access

 

Shareowner right to act by written consent

 

Shareowner right to call a special meeting


 

DIVERSITY IN BACKGROUND OF THE DIRECTOR NOMINEES 

 

         
                     
current or former CEOs   women and people of color   worked outside the United States   current or former CFOs or Chief Investment Officers   with STEM degrees   worked in government

 

DIVERSITY IN TENURE OF THE NOMINEES 

 

         We believe that diversity in experience and perspective are of the utmost importance for reaching sound decisions that drive shareowner value.

 

2   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement

 

 

 

  PROXY SUMMARY  

 

BOARD NOMINEES 

 

        Skills and Expertise
    Director Since Other Public
Boards
Financial Government International Knowledge of
Company/Industry
Risk Management
/Oversight
Senior Leadership Technology &
Innovation
                     
                     
LLOYD J. AUSTIN III
General, U.S. Army (Retired) and Former Commander of U.S. Central Command
2016 1      
                     
                     
DIANE M. BRYANT
Chief Operating Officer, Google Cloud
2017 0        
                     
                     
JOHN V. FARACI
Retired Chairman & Chief Executive Officer, International Paper
2005 2      
                     
                     
JEAN-PIERRE GARNIER
Chairman, Indorsia Pharmaceuticals Ltd.
1997 2      
                     
                     
GREGORY J. HAYES
Chairman & Chief Executive Officer, United Technologies Corporation
2014 1      
                     
                     
ELLEN J. KULLMAN
Retired Chair & Chief Executive Officer, E. I. du Pont de Nemours and Company
2011 2      
                     
                     
  MARSHALL O. LARSEN
Retired Chairman, President & Chief Executive Officer, Goodrich Corporation
2012 3        
                     
                     
HAROLD W. MCGRAW III
Chairman Emeritus, S&P Global Inc. (formerly McGraw Hill Financial, Inc.)
2003 1      
                     
                     
MARGARET L. O’SULLIVAN
Professor, Harvard University Kennedy School
2017 0        
                     
                     
FREDRIC G. REYNOLDS
Retired Executive Vice President & Chief Financial Officer, CBS Corporation
2016 2        
                     
                     
BRIAN C. ROGERS
Non-Executive Chairman, T. Rowe Price Group, Inc.
2016 1      
                     
                     
CHRISTINE TODD WHITMAN
President, The Whitman Strategy Group
2003 0      
                     

 

  All directors, except Mr. Hayes, are independent. Directors are elected annually by majority vote.
   

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   3

 

 

 

  PROXY SUMMARY  

 

 

Executive Compensation Overview

 

Aligning Pay With Performance. Our compensation program’s fundamental objective is aligning our executives’ pay with the interests of our shareowners. The program is designed to reward financial performance and effective strategic leadership that drives long-term, sustainable value.

 

CEO REALIZABLE   1-YEAR TOTAL SHAREOWNER  
AND REALIZED PAY ($M)*    RETURN (TSR)   
       
  122%
  of Target
UTC annual bonus factor
   
  28%
of Target
2015–2017 PSU vesting
   

 

*For details on how we evaluate the alignment of CEO pay and Company performance and for a definition of realizable and realized compensation, see pages 44-45.

 

Emphasis on “At Risk” Compensation. The vast majority of compensation for our CEO and other Named Executive Officers (“NEOs”) is “at risk” compensation, meaning it is contingent on performance. “At risk” compensation consists of annual bonus and long-term incentive awards that are subject to the achievement of pre-established performance goals and/or UTC’s stock performance.

 

CEO*    OTHER NEOS*   
       
   

 

*Charts reflect the value of base salaries, annual bonus and long-term incentive awards, as shown in the Summary Compensation Table on page 54.

 

4   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement

 

 
  PROXY SUMMARY  

 

2017 NEO TOTAL DIRECT COMPENSATION 

 

As discussed in detail on pages 37-41, our executive compensation program has three principal components of compensation: base salary, annual bonus and long-term incentives (“LTI”). Total direct compensation shown below reflects the Compensation Committee’s pay decisions, which represent its assessment of each NEO’s 2017 performance. Total direct compensation includes the grant date fair value of LTI awards granted in January 2018. This differs from the values included in the Summary Compensation Table on page 54, which shows the January 2017 LTI grants that relate to the Committee’s assessment of 2016 performance.

 

        Base Annual    
        Salary Bonus LTI* Total
        ($K) ($K) ($K) ($K)
               
Gregory J. Hayes 9% 20% 71% $1,500 $3,300 $12,044 $16,844
               
               
Akhil Johri 14% 19% 67% $860 $1,100 $4,003 $5,963
               
               
David L. Gitlin 9% 11% 80% $900 $1,100 $8,006 $10,006
               
               
Robert J. McDonough 15% 16% 69% $900 $900 $4,003 $5,803
               
               
Robert F. Leduc 14% 17% 69% $800 $1,000 $4,003 $5,803
               
                         

 

n Base Salaryn Annual Bonus   n LTI

 

*Reflects the grant date fair values of equity awards granted on January 2, 2018, calculated in accordance with the Compensation–Stock Compensation Topic of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), but excluding the effects of estimated forfeitures. For Mr. Gitlin, the amount shown includes a special retention restricted stock unit award which is discussed in more detail on page 47.

 

RECENT CHANGES TO OUR COMPENSATION PROGRAM 

 

 


 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   5

 

What we changed We added RSUs to our long-term incentive mix, beginning with the January 2017 grants. Our LTI mix for Executive Leadership Group (“ELG”) members is now: 50% Performance Share Units (“PSUs”) • 30% Stock Appreciation Rights (“SARs”) • 20% Restricted Stock Units (“RSUs”) We changed the cash flow metric used in our 2018 annual bonus program. Instead of a metric based on the ratio of free cash flow to net income, beginning with the 2018 awards, we will now use an absolute free cash flow metric. We strengthened share ownership requirements. The Committee increased share ownership requirements for our CFO and business unit presidents from 3x to 4x base salary. Why we changed it Each component of our LTI program is intended to encourage specific business objectives: • PSUs encourage the achievement of important financial goals. • SARs motivate decision-making that drive share price appreciation. • RSUs, which vest contingent on an executive’s continued employment with UTC, enhance our program’s retentive value and better align our program with those of our peers Switching to an absolute free cash flow metric: • Aligns our annual bonus program with the way we now communicate cash flow expectations to our investors. • Eliminates the net income portion of this metric, which is already used as a metric in our annual bonus program. • Places more emphasis on cash flow generation. Higher share ownership requirements will enhance the alignment of interests between our senior leaders and our shareowners.

 

1

 

     
    PROPOSAL 1    

Election of Directors

 

                                                                        

We are seeking your support for the election of the twelve candidates that the Board has nominated to serve on the Board of Directors for a one-year term beginning on the date of the Annual Meeting. We believe these nominees have qualifications consistent with our position as a large, diversified industrial corporation with worldwide operations. We also believe these nominees have the experience and perspective to guide the Company as we innovate and develop new products, compete in a broad range of markets around the world, and adjust to rapidly changing technologies, business cycles and competition.

 

 

   

 

Criteria for Board Membership

 

 

   
  The Board and the Committee on Governance and Public Policy (the “Governance Committee”) believe that there are general attributes that all directors must exhibit and other key skills and expertise that should be represented on the Board as a whole, but not necessarily by each director.
   

 

The Board and the Governance Committee believe that it is important that our directors, as a group, have the following attributes:

 

Objectivity and independence in making informed business decisions

 

Extensive knowledge, experience and judgment

 

The highest integrity

 

Diversity of perspectives

 

A willingness to devote the extensive time necessary to fulfill a director’s duties

 

An appreciation of the role of the corporation in society

 

Loyalty to the interests of UTC and its shareowners

 

While we do not have a specific policy on diversity of the Board, the ability to contribute to the diversity of perspectives present in Board deliberations is an attribute that is critical to our success.

 

Key Skills and Expertise

The Board and the Governance Committee have identified the key skills and expertise (and the associated attributes) that are important to be represented on the Board, in light of the Company’s business needs and strategy.

 

Financial Leadership of a financial firm or management of an enterprise’s finance function, resulting in proficiency in complex financial management, financial reporting processes, capital allocation, capital markets, and mergers and acquisitions — representing the importance we place on accurate financial reporting and robust financial controls and compliance.
   
Government Directors who have served in government, including the military, provide valuable insights on how significant government policies and public policy issues may affect our Company and how to respond to those matters most effectively.

 

6   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  ELECTION OF DIRECTORS   PROPOSAL 1  

 

International UTC is a global organization with manufacturing, research and development, sales and other offices in many countries. In addition, a significant portion of our sales come from outside the United States. Directors with international experience can thus provide valuable business, political and cultural perspectives regarding important aspects of our businesses and strategy.
   
Knowledge of
Company/
Industry
Knowledge of or experience in the Company’s specific industries, whether acquired through service as a senior leader in one of the specific industries, as an institutional investor or through longer-term service on the UTC Board.
   
Risk
Management/
Oversight
This experience is critical to the Board’s role in overseeing and understanding major financial risk exposures, including significant operational, compliance, reputational, strategic, country, political and cybersecurity risks.
   
Senior
Leadership
Extensive leadership experience for a significant enterprise, resulting in a practical understanding of organizations, processes, strategic planning, along with demonstrated strengths in developing talent, succession planning, and driving change and long-term growth.
   
Technology and
Innovation
Experience and/or expertise in research and development, engineering, science, digital media or technology. This translates into an understanding of UTC’s technological innovations, development and marketing challenges, how to anticipate technological trends, and how to generate disruptive innovation — all of which facilitate the execution of our business objectives and strategy.

 

The chart below represents the Board’s skills and expertise as a group. Each director’s biography also highlights the three key skills and areas of expertise upon which the Board particularly relies, in addition to describing each director’s relevant work experience and service.

 

SKILLS AND EXPERTISE 

 

  Senior Leadership                 9
  Knowledge of Company/Industry               8   
  Financial             7    
  Risk Management/Oversight             7    
  International           6      
  Technology and Innovation       4          
  Government     3            

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   7
 
  PROPOSAL 1   ELECTION OF DIRECTORS  

 

Director Orientation and Education

 

Director Orientation

New directors participate in an orientation program to familiarize them with the roles and responsibilities of the Board and its committees, including specific topics tailored to the director’s committee assignments. New directors also learn about the Company’s strategy, our business units, financial statements, significant financial, accounting and risk management issues, and our compliance programs. The orientation includes meetings with key executives and, to the extent practical, visits to significant facilities and operations, such as a visit in 2017 to Pratt & Whitney’s “engine school” where directors were familiarized with engines and the associated technologies.

 

Director Continuing Education

As part of the directors’ continuing education, the Board endeavors to conduct at least one annual onsite visit to a UTC business unit, providing directors with the firsthand opportunity to understand that unit’s operations and facilitating interaction between directors and employees. Directors are also encouraged to attend outside continuing education programs. Supplementary presentations and materials, including updates on recent business developments also are provided from time to time on an individual basis or collectively, as appropriate, on topical and beneficial subjects.

 

Board Self-Evaluation Process

 

The Board believes that a constructive self-evaluation process is an essential element of good corporate governance and Board effectiveness. To this end, the Board conducts an annual self-evaluation of the performance of the full Board, its standing committees and individual directors. The Governance Committee is responsible for and oversees the design and conduct of the annual self-evaluation. The Lead Director or non-Executive Chairman (as applicable) and the Governance Committee Chair jointly lead the self-evaluation process. Each of the Board’s standing committees report to the Board annually on the committee’s self-evaluation of its own performance.

 

The self-evaluation focuses on the Board’s overall effectiveness and informs the Board’s consideration of the following:

 

  Board roles
  Succession planning
  Refreshment objectives, including composition and diversity
  Opportunities to increase the Board’s effectiveness, including the addition of new skills and expertise

 

Incorporation of Feedback. The self-evaluation process generates constructive comments and discussion, and has resulted in improvements to our corporate governance practices and the Board’s effectiveness. For example, the Board has expanded the role and responsibilities of the Lead Director, restructured the standing committees to allocate more time to strategy discussions at the meetings of the full Board and to private sessions of the independent directors, and improved upon the self-evaluation process.

 

Nominating Process

 

The Governance Committee regularly reviews with the Board the qualifications that are most important in selecting candidates to serve as directors, taking into account UTC’s assorted operations and the mix of capabilities and experience represented on the Board already. As part of the Board’s annual evaluation of its overall effectiveness, the Board considers whether its composition reflects a diversity of experience, skills and perspectives that continuously enhance and refresh the Board’s ability to carry out its oversight role on behalf of shareowners. Based on these considerations, the Board adjusts the priority it gives to various director qualifications when identifying candidates. For example, the Board previously identified a gap in its digital and cybersecurity expertise, leading to the election to the Board in 2017 of Diane M. Bryant, formerly the Group President of Intel Corporation’s Data Center Group and the current Chief Operating Officer of Google Cloud.

 

The UTC Governance Guidelines and Bylaws do not impose term limits because such limits may unnecessarily cause the loss of experience and expertise important to the optimal operation of the Board. However, the Board’s self-evaluation process, including individual director evaluations, contributes to the Governance Committee’s consideration of each incumbent director as part of the nomination process.

 

8   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  ELECTION OF DIRECTORS   PROPOSAL 1  

 

The Governance Committee considers candidates recommended by directors, management and shareowners who meet the qualifications UTC seeks in its directors. A shareowner may recommend a director candidate by submitting a letter addressed to the UTC Corporate Secretary (see page 85 for contact information). The Company may also engage search firms from time to time to assist in identifying and evaluating qualified candidates.

 

Nominees

 

The Board, upon the recommendation of the Governance Committee, has nominated the twelve individuals listed in this Proxy Statement as director nominees, each of whom is a current director and, except for Dr. O’Sullivan who joined the Board in November 2017, was elected by the shareowners at the 2017 Annual Meeting.

 

As described in her biography, Dr. O’Sullivan brings to the Board and its committees (Audit and Governance and Public Policy) international, government and risk management/oversight experience, among other critical and desired attributes. This experience has been honed through Dr. O’Sullivan’s service at the U.S. Department of State and the White House, where she served on the National Security Council as Deputy National Security Advisor and as Special Assistant to the President.

 

Edward A. Kangas, who is currently the Lead Director and Chair of the Audit Committee, is not standing for re-election. He will retire from the Board on April 30, 2018, in accordance with UTC’s Governance Guidelines that require retirement from the Board at the annual meeting after the director reaches age 72, unless the Board makes an exception to the policy in special circumstances. The Board made such an exception for Mr. Kangas’ election at the 2017 Annual Meeting. The Company and the directors extend their sincere appreciation to Mr. Kangas for his dedicated service.

 

With Mr Kangas’ retirement, the Board has designated Ellen J. Kullman to serve as Lead Director and Fredric G. Reynolds to serve as Chair of the Audit Committee at the close of the 2018 Annual Meeting.

 

If, prior to the 2018 Annual Meeting, any of the Board’s nominees become unavailable to serve, the Board may select a replacement nominee or reduce the number of directors to be elected. If the Board selects a replacement nominee, the proxy holders will vote the shares for which they serve as proxy for that replacement candidate.

 

The Board of Directors recommends
a vote FOR each of the following
nominees:
  FOR

 

LLOYD J. AUSTIN III

 

General • U.S. Army (Retired) and Former Commander of U.S. Central Command

AGE 64 | DIRECTOR SINCE 2016 | COMMITTEES Audit • Governance and Public Policy

 

Key Skills and Expertise   GOVERNMENT      SENIOR LEADERSHIP      INTERNATIONAL

 

Experience:

 

Commander, U.S. Central Command (military leadership), 2013-2016
   
33rd Vice Chief of Staff of the U.S. Army, 2012-2013
   
Commander of United States Forces — Iraq, 2010-2011
   

Other Current Directorships:

 

Nucor Corporation, since 2017
   
Guest Services, Inc. (non-public)

Other Leadership Experience and Service:

 

Class of 1951 Leadership Chair for the Study of Leadership, U.S. Military Academy at West Point
   
Board of Trustees, Auburn University
   
Board of Trustees, Carnegie Corporation of New York
   
Member, Council on Foreign Relations


 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   9
 
  PROPOSAL 1   ELECTION OF DIRECTORS  

 

DIANE M. BRYANT

 

Chief Operating Officer • Google Cloud

AGE 56 | DIRECTOR SINCE 2017 | COMMITTEES Audit • Finance

 

Key Skills and Expertise   TECHNOLOGY AND INNOVATION      RISK MANAGEMENT/OVERSIGHT (CYBER)      FINANCIAL

 

Experience:

 

Chief Operating Officer, Google Cloud (cloud computing services), since 2017
   
Group President, Data Center Group, Intel Corporation (advanced technology, enterprise, cloud and communications infrastructure), 2017
   
Executive Vice President and General Manager, Data Center Group, Intel Corporation, 2012-2017
   
Corporate Vice President and Chief Information Officer, Intel Corporation, 2008-2012

Other Leadership Experience and Service:

 

Executive Sponsor, Network of Intel African American Employees
   
Member, Anita Borg Institute Technical Board
   
Intel spokesperson for STEM education
   
Established Diane Bryant Endowed Scholarship Fund for Diversity in Engineering at the University of California, Davis


 

JOHN V. FARACI

 

Retired Chairman & Chief Executive Officer • International Paper

AGE 68 | DIRECTOR SINCE 2005 | COMMITTEES Compensation • Finance (Chair) • Executive

 

Key Skills and Expertise   FINANCIAL      SENIOR LEADERSHIP      KNOWLEDGE OF COMPANY/INDUSTRY

 

Experience:

 

Chairman & Chief Executive Officer, International Paper (paper, packaging and distribution), 2003-2014
   
Executive Vice President and Chief Financial Officer, International Paper, 2000-2003
   
Chief Executive Officer and Managing Director, Carter Holt Harvey, Ltd. (former New Zealand subsidiary of International Paper), 1995-1999
   

Other Current Directorships:

 

ConocoPhillips Company, since 2015
   
PPG Industries, Inc., since 2012

Other Leadership Experience and Service:

 

Board of Trustees, American Enterprise Institute
   
Member, Council on Foreign Relations
   
Chairman, Board of Trustees, Denison University
   
Chairman, National Fish and Wildlife Foundation, 2014-2016


 

10   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  ELECTION OF DIRECTORS   PROPOSAL 1  

 

JEAN-PIERRE GARNIER

 

Chairman of the Board of Directors • Idorsia Pharmaceuticals Ltd.

AGE 70 | DIRECTOR SINCE 1997 | COMMITTEES Compensation (Chair) • Governance and Public Policy • Executive

 

Key Skills and Expertise   INTERNATIONAL      TECHNOLOGY AND INNOVATION      SENIOR LEADERSHIP

 

Experience:

 

Chairman of the Board of Directors, Idorsia Pharmaceuticals Ltd. (biopharmaceuticals), since 2017
   
Operating Partner, Advent International (global private equity), since 2011
   
Chief Executive Officer, Pierre Fabre S.A. (pharmaceuticals), 2008-2010
   
Chief Executive Officer and Executive Member of the Board of Directors, GlaxoSmithKline plc (pharmaceuticals), 2000-2008
   
Chief Executive Officer, SmithKline Beecham plc (pharmaceuticals), 2000
   
Chief Operating Officer and Executive Member of the Board of Directors, SmithKline Beecham plc, 1996-2000

Other Current Directorships:

 

Radius Health, Inc., since 2015
   
Chairman of the Board of Directors (non-executive), Alzheon, Inc. (non-public)
   

Former Public Company Directorships:

 

Chairman of the Board of Directors, Actelion Ltd., 2011-2017
   
Renault S.A., 2009-2016
   

Other Leadership Experience and Service:

 

Advisory Board, Newman’s Own Foundation
   
Board of Trustees, Max Planck Florida Institute for Neuroscience
   
Knight Commander of the Order of the British Empire
   
Officier de la Légion d’Honneur of France


 

GREGORY J. HAYES

 

Chairman & Chief Executive Officer • United Technologies Corporation

AGE 57 | DIRECTOR SINCE 2014 | COMMITTEES Finance • Executive (Chair)

 

Key Skills and Expertise   SENIOR LEADERSHIP      FINANCIAL      KNOWLEDGE OF COMPANY/INDUSTRY

 

Experience:

 

Chairman & Chief Executive Officer, United Technologies Corporation, since 2016
   
President, Chief Executive Officer and Director, 2014-2016
   
Senior Vice President and Chief Financial Officer, 2008-2014
   
Various senior positions since joining UTC in 1999 through the merger with Sundstrand Corporation, including Vice President, Accounting and Finance, and responsibility for UTC’s Corporate Strategy group
   

Other Current Directorships:

 

Nucor Corporation, since 2014


 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   11
 
  PROPOSAL 1   ELECTION OF DIRECTORS  

 

ELLEN J. KULLMAN

 

Retired Chair & Chief Executive Officer • E. I. du Pont de Nemours and Company

AGE 62 | DIRECTOR SINCE 2011 | COMMITTEES Governance and Public Policy (Chair) • Compensation • Executive

 

Key Skills and Expertise   TECHNOLOGY AND INNOVATION      SENIOR LEADERSHIP      KNOWLEDGE OF COMPANY/INDUSTRY

 

Experience:

 

Chair & Chief Executive Officer, E. I. du Pont de Nemours and Company (provider of basic materials and innovative products and services for diverse industries), 2009-2015
   
President, E. I. du Pont de Nemours and Company, 2008
   
Executive Vice President, E. I. du Pont de Nemours and Company, 2006-2008
   
Group Vice President, E. I. du Pont de Nemours and Company, 1988-2006
   

Other Current Directorships:

 

Amgen, Inc., since 2016
   
Goldman Sachs, since 2016
   
Dell Technologies (non-public)
   
Carbon3D, Inc. (non-public)

Other Leadership Experience and Service:

 

Member, The Business Council
   
Member, National Academy of Engineering
   
Board of Advisors, Tufts University School of Engineering
   
Board of Trustees, Northwestern University
   
North American Advisory Council of Temasek Holdings


 

MARSHALL O. LARSEN

 

Retired Chairman, President & Chief Executive Officer • Goodrich Corporation

AGE 69 | DIRECTOR SINCE 2012 | COMMITTEES Audit • Finance

 

Key Skills and Expertise   KNOWLEDGE OF COMPANY/INDUSTRY      SENIOR LEADERSHIP      FINANCIAL

 

Experience:

 

Chairman, President & Chief Executive Officer, Goodrich Corporation (supplier of systems and services to the aerospace and defense industry), 2003-2012
   
President, Chief Operating Officer and Director, Goodrich Corporation, 2002-2003
   
Executive Vice President, Goodrich Corporation, and President and Chief Operating Officer, Goodrich Aerospace, 1995-2002

Other Current Directorships:

 

Air Lease Corporation, since 2014
   
Becton, Dickinson and Company, since 2007
   
Lowe’s Companies, Inc. (Lead Director), since 2004


 

12   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  ELECTION OF DIRECTORS   PROPOSAL 1  

 

HAROLD W. MCGRAW III

 

Chairman Emeritus • S&P Global Inc. (formerly McGraw Hill Financial, Inc.)

AGE 69 | DIRECTOR SINCE 2003 | COMMITTEES Compensation • Governance and Public Policy

 

Key Skills and Expertise   FINANCIAL      SENIOR LEADERSHIP      KNOWLEDGE OF COMPANY/INDUSTRY

 

Experience:

 

Chairman Emeritus, S&P Global Inc. (formerly McGraw Hill Financial, Inc.) (ratings, benchmarks and analytics for financial reports), since 2015
   
Chairman, McGraw Hill Financial, Inc., 1999-2015
   
President and Chief Executive Officer, The McGraw-Hill Companies, 1998-2013
   
President and Chief Operating Officer, The McGraw-Hill Companies, 1993-1998
   

Other Current Directorships:

 

Phillips 66 Company, since 2012
   

Former Public Company Directorships:

 

ConocoPhillips Company, 2005-2012

Other Leadership Experience and Service:

 

Board of Trustees, Asia Society
   
Former Chairman, Business Roundtable
   
Board of Trustees, Carnegie Hall
   
Board of Directors, Committee Encouraging Corporate Philanthropy
   
Board of Trustees, New York Public Library
   
Chairman, U.S. Council for International Business
   
Member, U.S. Trade Representative’s Advisory Committee for Trade Policy and Negotiations
   
Honorary Chairman, International Chamber of Commerce


 

MARGARET L. O’SULLIVAN

 

Professor • Harvard University Kennedy School

AGE 48 | DIRECTOR SINCE 2017 | COMMITTEES Audit • Governance and Public Policy

 

Key Skills and Expertise   INTERNATIONAL      GOVERNMENT      RISK MANAGEMENT/OVERSIGHT (POLITICAL RISK)

 

Experience:

 

Jeane Kirkpatrick Professor of the Practice of International Affairs, Harvard University Kennedy School (higher education), since 2009
   
Director of the Geopolitics of Energy Project, Harvard University Kennedy School, since 2011
   
Lecturer and Senior Fellow, Harvard University Kennedy School, 2008-2009
   
Deputy National Security Advisor for Iraq and Afghanistan, National Security Council, 2005-2007
   
Special Assistant to the President, National Security Council, 2004-2007
   
Deputy Director (Governance), Iraq Coalition Provisional Authority, 2003-2004
Principal Advisor to the President’s Special Envoy to the Northern Ireland Peace Process, U.S. Department of State, 2001-2003
   
Fellow, The Brookings Institution, 1997-2001
   

Other Leadership Experience and Service:

 

Adjunct Senior Fellow, Council on Foreign Relations
   
Board of Trustees, Friends of Inter-Mediate
   
Advisory Council, George W. Bush Institute Women’s Initiative
   
International Advisory Board, Linklaters LLP
   
Board of Trustees, The German Marshall Fund of the United States
   
Board of Directors, The Mission Continues
   
Executive Committee, Trilateral Commission


 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   13
 
  PROPOSAL 1   ELECTION OF DIRECTORS  

 

FREDRIC G. REYNOLDS

 

Retired Executive Vice President & Chief Financial Officer • CBS Corporation

AGE 67 | DIRECTOR SINCE 2016 | COMMITTEES Audit • Finance

 

Key Skills and Expertise   FINANCIAL      RISK MANAGEMENT/OVERSIGHT      TECHNOLOGY AND INNOVATION

 

Experience:

 

Executive Vice President and Chief Financial Officer, CBS Corporation (mass media), 2005-2009
   
President and Chief Executive Officer, Viacom Television Stations Group (CBS predecessor), 2001-2005
   
Executive Vice President and Chief Financial Officer, Viacom, Inc., 2000-2001
   
Executive Vice President and Chief Financial Officer, Westinghouse Electric Corporation, 1994-2000
   
Various positions at PepsiCo, Inc., 1982-1994

Other Current Directorships:

 

Hess Corporation, since 2013
   
Mondelez International, Inc. (formerly Kraft Foods, Inc.), since 2007
   
MGM Holdings, Inc. (non-public)
   
NEP Group, Inc. (non-public)
   
Pinterest (non-public)
   

Former Public Company Directorships:

 

AOL, Inc., 2009-2015


 

BRIAN C. ROGERS

 

Non-Executive Chairman • T. Rowe Price Group, Inc.

AGE 62 | DIRECTOR SINCE 2016 | COMMITTEES Compensation • Finance

 

Key Skills and Expertise   FINANCIAL      RISK MANAGEMENT/OVERSIGHT      SENIOR LEADERSHIP

 

Experience:

 

Chairman of the Board of Directors, T. Rowe Price Group, Inc. (investment management), 2007-2017
   
Chief Investment Officer, T. Rowe Price Group, Inc., 2004-2017
   
Various other senior leadership roles since joining T. Rowe Price Group, Inc., in 1982
   

Other Current Directorships:

 

Chairman of the Board (non-executive), T. Rowe Price Group, Inc., since 2017

Other Leadership Experience and Service:

 

Chairman, Finance Committee, Archdiocese of Baltimore
   
Board of Directors, Greater Baltimore Committee
   
Board of Directors, Harvard Management Company
   
Board of Trustees, Johns Hopkins Medicine
   
Maryland Economic Development Commission


 

14   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  ELECTION OF DIRECTORS   PROPOSAL 1  

 

CHRISTINE TODD WHITMAN

 

President • The Whitman Strategy Group

AGE 71 | DIRECTOR SINCE 2003 | COMMITTEES Finance • Governance and Public Policy

 

Key Skills and Expertise   GOVERNMENT      SENIOR LEADERSHIP      KNOWLEDGE OF COMPANY/INDUSTRY

 

Experience:

 

President, The Whitman Strategy Group (environmental and energy consulting), since 2004
   
Administrator, U.S. Environmental Protection Agency, 2001-2003
   
Governor, State of New Jersey, 1994-2001
   

Former Public Company Directorships:

 

Texas Instruments, Inc., 2003-2017

Other Leadership Experience and Service:

 

Chair, Board of Directors, American Security Project
   
Board of Directors, Center for Sustainable Shale Development
   
Co-Chair, Clean and Safe Energy Coalition
   
Advisory Board, Corporate Eco Forum
   
Member, Council on Foreign Relations
   
Vice Chair, Board of Trustees, Eisenhower Fellowships
   
Senior Advisory Committee, Institute of Politics at Harvard University Kennedy School
   
Advisory Board, The Northeast Maglev
   
Advisory Board, Terrestrial Energy


 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   15
 
     

 

    CORPORATE    

Governance

 

Our Commitment to Sound Corporate Governance

 

UTC is committed to strong corporate governance practices that are designed to maintain high standards of oversight, accountability, integrity and ethics, while promoting long-term growth in shareowner value.

 

Our governance structure enables independent, experienced and accomplished directors to provide advice, insight and oversight to advance the interests of the Company and our shareowners. UTC has long strived to maintain sound governance standards, as reflected in our Code of Ethics, Governance Guidelines, our systematic approach to risk management, and in our commitment to transparent financial reporting and strong internal controls.

 

We encourage you to visit the Corporate Governance section of our website www.utc.com/Who-We-Are/Corporate-Governance/Pages/default.aspx where you may access information about corporate governance at UTC, including:

 

Our Governance Guidelines

 

Our Board Committee Charters

 

Our Certificate of Incorporation and Bylaws

 

Our Code of Ethics

 

Director Independence Policy

 

Related Persons Transaction Policy

 

Public Activities

 

Information about our Ombudsman program, which allows UTC’s employees and third parties to raise questions confidentially and outside the usual management channels

 

Information about how to communicate concerns to the Board of Directors

 

 

Shareowner Engagement

 

The Board and Management believe in transparent and open communication with investors. Over the years, our engagement with investors has resulted in a number of changes to our Corporate Governance Guidelines, shareowner rights, Board composition and the design of our executive compensation program.

 

Each fall we solicit feedback from our largest investors on changes that the Board (or a Committee) is considering with respect to UTC’s executive compensation program and on our corporate governance practices. In the spring, after the proxy statement is filed, we hold discussions that generally focus on the clarity and effectiveness of our disclosures and respond to investors’ questions. From time to time, we have also discussed other topics with investors, such as Board composition, leadership structure, governance best practices, executive compensation program design, corporate social responsibility, and UTC’s diversity and sustainability efforts.

 

In addition, senior leaders and independent directors routinely engage with our shareowners on financial performance, capital allocation and business strategy. In 2017, Management presented at seven industry conferences and investor days, hosted shareowners at UTC’s Corporate Headquarters and visited shareowners in the Americas, Asia and Europe throughout the year.

 

In 2017, UTC contacted institutional investors holding more than 400 million shares of UTC Common Stock and subsequently engaged with investors holding more than 340 million shares.

 

Board Leadership Structure

 

Policy on Chairman and CEO Roles

The Committee on Governance and Public Policy (the “Governance Committee”) routinely reviews our governance practices and board leadership structure. Under our Governance Guidelines, the Board does not have a fixed policy on whether or not the Company’s CEO is permitted to serve simultaneously as Chairman of the Board. Instead, the Board believes this determination should be based on the Company’s best interests in light of the circumstances, which may vary over time. The Board, therefore, chooses the structure that it believes can provide the most effective leadership and oversight for the Company while also facilitating the most effective functioning of the Board and Management. In making this decision, the Board considers a range of factors, including: the Company’s operating and financial performance under the then-existing structure; any recent or anticipated changes in the CEO role; the effectiveness of the then-current processes and structures for Board interaction with and oversight of management; and the importance of maintaining a single voice in leadership communications and Board oversight, both internally and with investors.

 

16   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  CORPORATE GOVERNANCE  

 

Lead Director Responsibilities

Under our Governance Guidelines, the Board designates a non-employee director to serve as Lead Director when the Chairman is not independent. The Lead Director’s responsibilities include the following and essentially mirror the responsibilities of the non-executive Chairman under the Governance Guidelines and Bylaws:

 

Calls and presides over private sessions of the independent directors or special meetings of the Board of Directors

 

Serves as a liaison between the independent directors and the Chairman

 

Engages with significant constituencies, as requested

 

Works with the Chairman to plan and set the agenda for Board meetings

 

Oversees the evaluation and compensation of the CEO’s performance

 

Facilitates succession planning and management development

 

Works jointly with the Chair of the Governance Committee to lead the Board’s annual self-evaluation process

 

Authorizes retention of outside advisors and consultants who report to the Board on Board-wide issues

 

 

The Board believes that a non-executive Chairman or Lead Director with defined responsibilities enhances the effectiveness of the independent directors, improves risk management and oversight, and provides a channel for independent directors to candidly raise issues or concerns for Board consideration.

 

UTC’s independent directors meet in regularly scheduled private sessions without Management and in additional sessions when requested. In practice, the private sessions occur before or after most Board meetings.

 

Board Committees

 

Our Board has four standing committees: Audit, Governance and Public Policy, Compensation and Finance. Except for the Finance Committee (which includes our CEO as a member), each standing committee is composed exclusively of independent directors. Each standing committee has the authority to retain independent advisors to assist in the fulfillment of its responsibilities, to approve the fees paid to those advisors and to terminate their engagements.

 

All committee charters, which are reviewed by each committee annually, are available on the Corporate Governance section of UTC’s website (see page 16).

 

 

 

AUDIT

 

 

2017

Meetings: 7

 

 

Edward A. Kangas
(Chair)

 

Lloyd J. Austin III

Diane M. Bryant

Marshall O. Larsen

Margaret L. O’Sullivan*

Fredric G. Reynolds

Assist the Board in overseeing the following: the integrity of UTC’s financial statements; the independence, qualifications and performance of UTC’s internal and external auditors; the Company’s compliance with its policies and procedures, internal controls, Code of Ethics, and applicable laws and regulations; and policies and procedures relating to risk assessment and management

 

Nominate, for appointment by shareowners, an accounting firm to serve as UTC’s independent auditor and maintain responsibility for compensation, retention and oversight of the auditor

 

Pre-approve all auditing services and permitted non-audit services to be performed for UTC by its independent auditor

 

Review and approve the appointment and replacement of the senior Internal Audit executive

 

The Board determined during 2017 that Messrs. Kangas, Larsen and Reynolds each are “audit committee financial experts,” as that term is defined in SEC rules.

 

* Appointed a member of the Committee effective November 1, 2017.

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   17
 
  CORPORATE GOVERNANCE  

 

GOVERNANCE AND PUBLIC POLICY

 

 

2017

Meetings: 4

 

 

Ellen J. Kullman
(Chair)

 

Lloyd J. Austin III

Jean-Pierre Garnier

Marshall O. Larsen

Harold W. McGraw III

Margaret L. O’Sullivan*

Christine T. Whitman

Identify and recommend qualified candidates for election to the Board

 

Develop and recommend appropriate corporate governance guidelines

 

Oversee the design and conduct of the annual self-evaluation of the Board and its committees’ performance  

 

Recommend appropriate compensation of directors

 

Submit to the Board recommendations for committee assignments

 

Review and monitor the orientation of new Board members and the continuing education of all directors

 

Review and oversee UTC’s positions on significant public issues and corporate social responsibility, including diversity, the environment and safety

 

COMPENSATION

 

 

2017

Meetings: 5

 

 

Jean-Pierre Garnier (Chair)

 

John V. Faraci

Edward A. Kangas

Ellen J. Kullman

Harold W. McGraw III

Brian C. Rogers

Review the Company’s executive compensation policies and practices and their associated risks

 

Review and approve the design of and set performance goals for the annual bonus and long-term incentive awards for executives

 

Evaluate the performance of the Company, the business units and the NEOs relative to the pre-established performance goals set by the Committee for the annual and long-term incentive programs

 

Approve compensation levels for ELG members and executive officers

 

 

FINANCE

 

 

2017

Meetings: 4

 

 

John V. Faraci
(Chair)

 

Diane M. Bryant

Gregory J. Hayes

Marshall O. Larsen

Fredric G. Reynolds

Brian C. Rogers

Christine T. Whitman

Review and make recommendations to the Board on the management of the Company’s financial resources and financial risks

 

Consider plans for significant acquisitions and divestitures and their potential financial impact, and monitor progress on pending and completed transactions

 

Review significant financing programs in support of business objectives

 

Review significant capital appropriations

 

Review policies and programs related to: dividends and share repurchases; financing, working and long-term capital requirements; managing exposure to foreign exchange, interest rates and raw material prices; investment of pension assets; and insurance and risk management

 

* Appointed a member of the Committee effective November 1, 2017.

 

18   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  CORPORATE GOVERNANCE  

 

Director Independence

 

Under the UTC Corporate Governance Guidelines and the New York Stock Exchange (“NYSE”) listing requirements, a majority of our directors must be independent. The Board has therefore adopted a Director Independence Policy, available on our website (see page 16), to guide the director independence determination, including categories of relationships that the Board has determined would not affect a director’s independence.

 

Before joining the Board and annually thereafter, each director completes a detailed questionnaire that provides information about relationships that may affect the independence determination or that may otherwise require disclosure. The Governance Committee then completes an assessment considering all known relevant facts and circumstances about any relationship bearing on the independence of a director or nominee. In determining the independence of our directors, the Governance Committee considered sales and purchases of products and services, in the ordinary course of business, between UTC (including its subsidiaries) and other companies, as well as charitable organizations, where nominees are or have been executive officers. In each of the past three years, the annual payments UTC made or received for products and services or UTC’s charitable contributions fell well below the thresholds in our Independence Policy and the NYSE listing requirements (the greater of $1 million or 2% of the other company’s or organization’s total gross revenues).

 

The Board has determined that each of the nominees for election at the 2018 Annual Meeting, other than Mr. Hayes, qualifies as independent under the Independence Policy and the NYSE requirements. Specifically, none of the nominees, other than Mr. Hayes, has a business, financial, family or other relationship with UTC that is considered to be material under UTC’s Independence Policy.

 

How We Manage Risk

 

Our Risk Management Framework

UTC’s enterprise risk management (“ERM”) program and policies conform to the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. Under our policies, the president of each major business unit is responsible for identifying and reporting to the Chairman & CEO the risks that could affect the achievement of business goals and strategies, assessing the likelihood and potential impact of significant risks, and prioritizing these risks and the actions to be taken to address them.

 

The Chairman & CEO, Chief Financial Officer and General Counsel periodically report on UTC’s risk management policies and practices to the relevant Board committees and to the full Board.

 

The Board’s Role in Risk Management

The full Board is responsible for the oversight of UTC’s risk management process and structure, while the Audit Committee oversees UTC’s overall policies and practices for enterprise risk management. In addition, responsibility for the oversight of specific risk categories is allocated among the Board and its committees as follows:

 

BOARD RISK OVERSIGHT: AREAS OF RESPONSIBILITY 

 

 

 

 

 

 

 

 

 

 

                 

Full Board of Directors

 

Audit Committee

 

Committee on Governance and Public Policy

 

Compensation Committee

 

Finance Committee

                 

Government relations, major strategies and business objectives

 

Significant risks, such as major litigation and succession planning

 

 

Financial

 

Operational

 

Compliance

 

Reputational

 

Strategic

 

Cybersecurity

 

Corporate governance

 

Director candidate review

 

Conflicts of interest

 

Director independence

 

Environment

 

Safety

 

Equal employment opportunity

 

Public policy issues

 

Compensation and benefits policies, practices and plans

 

Senior executive performance assessments

 

Executive retention

 

Capital structure

 

Financing

 

Pensions

 

Capital transactions

 

Foreign exchange, interest rates and raw material prices

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   19
 

  CORPORATE GOVERNANCE  

 

Compensation Risk

The Compensation Committee believes that executive compensation payouts must align with the Company’s financial performance, be earned in a manner consistent with UTC’s Code of Ethics, promote long-term, sustainable value for shareowners, and strike a balance between appropriate levels of financial opportunity and risk. Through UTC’s ERM framework, the Compensation Committee identifies, monitors and mitigates compensation risk in the following ways:

 

Emphasis on Long-Term Performance. Long-term incentives are the cornerstone of UTC’s executive compensation program. Our LTI program incorporates long-term financial performance metrics which align executive and shareowner interests to create sustainable value.

 

Rigorous Share Ownership Requirements. UTC maintains significant share ownership requirements for our senior executives and directors. These requirements are intended to reduce risk by aligning the economic interests of executives and directors with that of our shareowners. A significant stake in future performance discourages the pursuit of short-term opportunities that create excessive risk.

 

Prohibition on Hedging. UTC prohibits directors and executives from entering into short sales of our securities or similar transactions where potential gains are linked to a decline in UTC’s stock price. Moreover, unvested equity awards may not be assigned, traded, transferred or otherwise disposed of for economic benefit.

 

Comprehensive Clawback Policy. UTC maintains a comprehensive policy on recoupment (see page 52 for more details) that applies to both annual and long-term incentive compensation. The policy allows UTC to clawback compensation in a number of circumstances including, but not limited to, financial restatements, compensation earned as a result of financial miscalculations,violations of UTC’s Code of Ethics and violations of post-employment restrictive covenants.

 

Post-Employment Covenants. ELG members may not engage in post-employment activities detrimental to UTC, such as disclosing proprietary information, soliciting UTC employees or engaging in competitive activities.

 

Public Policy Engagement

 

UTC’s government relations initiatives are intended to educate and inform officials and the public on a broad range of public policy issues that are important to our businesses. These initiatives are consistent with the interests of UTC’s shareowners, and are not based on the personal agendas of individual directors, officers or employees. The Board is actively engaged in reviewing and monitoring the Company’s government relations activities, including the activities of the United Technologies Corporation Federal Political Action Committee (“UTC PAC”).

 

UTC does not make political contributions to candidates for federal office. The UTC PAC is nonpartisan and supports candidates for federal office and the national political organizations of both major parties through voluntary giving by individual employees — thus providing employees, regardless of their political affiliations, with a legal and ethical way to speak with a unified voice on issues important to our Company.

 

UTC does not contribute to candidates for state and local office or to state and local party committees. We also do not make contributions towards communications to the general public that expressly advocate the election or defeat of a clearly identified federal candidate, nor do we provide funding to support or oppose ballot initiatives.

 

UTC’s federal lobbying activities and expenditures can be reviewed through the reports filed with Congress that can be accessed through our website referenced on page 16. UTC’s state lobbying activities, which are also available on our website, are generally limited to 10 states and involve issues such as building safety and related building codes, economic development, and various business regulation issues.

 

 

   
  For the second consecutive year, UTC was recognized as a “Trendsetter” by the nonprofit and nonpartisan Center for Political Accountability (“CPA”) — placing UTC among the 50 companies in the S&P 500 that received the highest scores for the CPA-Zicklin Index for Corporate Political Disclosure and Accountability.
   

 

20   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement

 
     

 

    CORPORATE    

Responsibility

 

Corporate Sustainability

 

UTC has long recognized the value of sustainable practices and since 1992 has implemented sustainability initiatives throughout our organization and value chain. We believe our operations should not compromise the environmental or economic health of future generations, and we have seen firsthand how responsible management practices provide value to our operations, employees, customers, shareowners and the communities where we operate.

 

We believe that trends in urbanization and population growth will continue to increase demand for more sustainable products and behaviors. Each of UTC’s major businesses is critical to modern life and the continuing development of prosperous economies around the world. As a recognized leader in these sectors, UTC is well-positioned to reduce the impact of urbanization and population growth on the environment. We continually work to reduce the environmental footprint of our manufacturing facilities, while offering our customers the most cutting-edge, sustainable technologies, including:

 

Pratt & Whitney’s Geared Turbofan engine family improves fuel efficiency by 16%, cuts NOx emissions by 50% to the regulatory standard and reduces the noise footprint by 75%.
   
Carrier Transicold & Refrigeration Systems’ cold-chain solutions are used in the preservation of food from origin to point of sale, helping to reduce global food waste and its environmental impact.
   
Carrier’s NaturaLINE unit combines a natural refrigerant with energy-efficient technology to reduce the carbon footprint of marine container refrigeration by 28% when compared to previous Carrier equipment using conventional synthetic refrigerants.
   
Marioff’s HI-FOG water mist systems use up to 90% less water than traditional sprinkler systems.
   
Carrier’s Infinity Controls, combined with its energy-efficient geothermal solutions, can reduce heating and cooling costs by up to 70% when compared to ordinary forced air heating and cooling systems.
   
Otis’ Gen2 machine with ReGen drive is smaller and capable of reducing overall elevator energy consumption by 75% under normal operation when compared to conventional geared machines with non-regenerative drives.
Otis’ Gen2 Switch elevator uses less electricity than most household appliances; if the power fails, the Gen2 Switch seamlessly transitions from the grid to battery power and is also able to operate on wind and solar power.
   
UTC Aerospace Systems’ composite actuation components for large commercial aircraft can result in between 30% to 70% weight savings (depending on wingspan length), thereby reducing fuel burn.
   
UTC Aerospace Systems’ 360-degree acoustically smooth inlet nacelle system helps reduce aircraft noise from engines like Pratt & Whitney’s GTF engine.
   
UTC Aerospace Systems’ SmartProbe Air Data System reduces the number of sensors and pneumatic pressure lines, resulting in up to 50% weight savings when compared to traditional systems, thereby reducing fuel burn.

 

We continually work to reduce the environmental footprint of our manufacturing facilities, while offering our customers the most cutting-edge, sustainable technologies.

 


 

Since 1997 we have achieved:

 

Triple
our sales
  $$$ 33%
reduction in
our greenhouse
gas emissions
   
  62%
reduction
in water
consumption   
 

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   21

 
  CORPORATE RESPONSIBILITY  

 

Progress Toward Our 2020 Environmental Sustainability Goals

We set five-year environmental sustainability goals for which we track progress on an annual basis. Our current goals are for the period between 2016 and 2020. We are committed to a targeted reduction in environmental impacts, irrespective of business growth. As a result, we measure our progress towards the attainment of these goals in absolute terms, rather than adjusting for the opening or closing of manufacturing facilities.(1) In 2017, we saw progress in all of our goals:

 

5-YEAR ENVIRONMENTAL SUSTAINABILITY GOALS(2)  

 

 

(1) Consistent with the Greenhouse Gas Protocol, UTC’s goals and targets are adjusted to reflect the impact of acquired companies at the time of acquisition and to remove divested companies from UTC’s measured performance. For example, goals and actual performance were recalibrated in 2013 to account for the Goodrich acquisition and in 2015 to reflect the sale of Sikorsky. UTC’s goals and targets are not adjusted for the opening of new facilities due to organic growth or for the closing of facilities without a divestiture. Actual levels reflect data reported quarterly by UTC sites under common reporting and quality standards. Reported data are reviewed and consolidated by UTC’s Corporate Office. UTC annually submits site energy use and greenhouse gas emissions data to independent review based on International Standards Organization 14064 Part 3 criteria for the validation of greenhouse gas assertions.
(2) The 2020 goals and progress toward these goals are compared to the following 2015 adjusted baselines: greenhouse gas emissions (2 million mtCO2e), hazardous waste generation (60 million pounds), chlorinated and brominated solvent air chemical emissions (148,000 pounds), water use (1.8 billion gallons) and total industrial waste recycled (75%).

 

2017 RECOGNITION FOR WORLD CLASS SUSTAINABILITY PRACTICES   

 

 

Carbon Disclosure Project

The Carbon Disclosure Project rated UTC A- for our actions and performance to reduce greenhouse gas emissions and mitigate climate change.

 

  We are committed to a targeted
reduction in environmental impacts,
regardless of business growth.

 

22   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement

 
  CORPORATE RESPONSIBILITY  

 

Corporate Citizenship

 

UTC takes great pride in building a diverse work environment, supporting lifelong employee learning, and contributing to charitable and community causes. In the same way that we set the highest standards for our business operations, we apply the highest corporate responsibility standards and rigorous performance measurements to these efforts.

 

UTC’s Commitment to Diversity and Inclusion

We believe that a diverse and inclusive workplace provides us with a competitive advantage and enables us to better meet the needs of a globally diverse market and customer base by encouraging innovative thought, better team performance and quality customer service.

 

Paradigm for Parity

In 2017, UTC joined the Paradigm for Parity coalition (“P4P”), pledging our commitment to achieving gender parity across all levels of corporate leadership. As part of this pledge, UTC has adopted the P4P five-point roadmap:

 

 

Employee Inclusion and Engagement

UTC has 112 Employee Resource Groups (“ERGs”) globally that enhance our workplace culture by supporting recruitment, inclusion, career development and community outreach initiatives for nine diverse groups of employees (African American, Asian American, Employment Disability, Hispanic, Generational, LGBT, Military/Veterans, Women and Professionals).

 

2017 RECOGNITION FOR DIVERSITY AND INCLUSION   

 

 

Among Best Places to Work for Latinas

For the fifth straight year, UTC was ranked among the top 10 best places to work for Latinas, out of 50 companies honored by Latina Style Magazine.

   

Among Best Places to Work for LGBTQ Equality

UTC earned the top rating of 100% from the Human Rights Campaign Foundation Corporate Equality Index, along with the distinction of being one of the Best Places to Work for LGBTQ Equality.

             
 

Among Best Places to Work for Employment Disability Inclusion

UTC was recognized by the Disability Equality Index (“DEI”), a joint initiative between the U.S. Business Leadership Network and the American Association of People with Disabilities, as a 2017 DEI Best Place to Work.

   

Among Noteworthy Companies for Diversity Practices

UTC was named a noteworthy company by DiversityInc, an honor that recognizes the top U.S. companies for diversity and inclusion management, with a focus on hiring, retaining and promoting women, minorities, people with disabilities, LGBTQ and veterans.

 

We believe diversity in

the workplace provides us

with a competitive advantage.

 

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   23
 

  CORPORATE RESPONSIBILITY  

 

Our Employee Scholar Program

At UTC, we support a culture of lifelong learning in which our employees are encouraged to expand their knowledge and capabilities to maintain their competitive skills in an ever-changing world. We aspire to maintain a highly educated workforce capable of the innovation required of our technology-driven company.

 

Our Employee Scholar Program has been in place for more than 20 years and has been consistently recognized as one of the world’s most comprehensive employee education programs.

 

39,300+ $1.3 billion 5,800+ 60+
degrees earned invested employees participated in 2017 countries with participating employees since 1996
       

 

UTC Cares about the Community

UTC focuses its sustainability and corporate responsibility initiatives in three areas: environment, people and communities. Through grants to leading nonprofit organizations and employee volunteerism, we are committed to making the world a better place while building long-term, sustainable value for our shareowners.

 

In our signature collaborations with The New York Academy of Sciences and the National Geographic Society, we work to advance achievement and thought leadership in science, technology, engineering and math (“STEM”) education, as well as in the study of sustainable cities. With regard to STEM, UTC’s investments enable virtual one-on-one mentoring of students by science and engineering professionals. Our Urban Expeditions initiative with the National Geographic Society produces cutting-edge research and reporting on urbanization megatrends, while also highlighting solutions for the environmental impacts of rapid urban growth.

 

In 2017, we worked to help those affected by Hurricane Maria in Puerto Rico. The Company provided critical supplies and offered our facilities on the island to distribute meals, showers and other basic needs to our employees. Separately, UTC employees delivered toys and clothing to local orphanages and community centers and traveled to isolated towns to provide disaster relief.

 

These efforts, along with our support for veterans and military family programs, local educational endeavors, and artistic, historical and cultural initiatives, demonstrate our commitment to our employees and the communities where we do business.

 

 

We continue to support leading

nonprofit organizations worldwide through

grants and employee volunteerism.

 

24   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement

 
     

 

    COMPENSATION    

of Directors

 

Pay Structure

 

Annual Retainer

The following chart shows annual retainers for the April 2017 to April 2018 Board cycle for non-employee directors. 40% is payable in cash and the remaining 60% is payable in deferred stock units (“DSUs”). Alternatively, a director may elect to receive 100% of his or her retainer in DSUs.

 

Role  Cash ($)   Deferred
Stock Units ($)
   Total ($)
Base Retainer  $120,000   $180,000   $300,000
Incremental Amount Above Base Retainer*              
Lead Director  $32,000   $48,000   $80,000
Audit Committee Chair  $16,000   $24,000   $40,000
Audit Committee Member  $12,000   $18,000   $30,000
Compensation Committee Chair  $10,000   $15,000   $25,000
Finance Committee Chair  $10,000   $15,000   $25,000
Committee on Governance and Public Policy Chair  $10,000   $15,000   $25,000

 

* Directors serving in multiple roles receive incremental compensation for each role.

 

Directors do not receive additional compensation for attending regularly scheduled Board or committee meetings, but do receive an additional $5,000 for each special meeting attended in person. The directors did not attend any special Board or committee meetings in person during 2017.

 

Annual retainers are paid each year following the Annual Meeting. New directors joining the Board between the Annual Meeting and the end of September receive 100% of the annual retainer. Directors joining the Board between October and the following April receive 50% of the annual retainer.

 

After a non-employee director leaves the Board, DSUs are converted into shares of UTC Common Stock either in a lump-sum payment or in 10- or 15-year installments, at the election of the director.

 

New Director RSU Award

Non-employee directors receive a one-time $100,000 restricted stock unit (“RSU”) award when first elected to the Board. This award vests in equal portions over five years and is distributed in shares of UTC Common Stock upon termination of service. Ms. Bryant and Dr. O’Sullivan received this award in 2017.

 

Treatment of Dividends

When UTC pays a dividend on Common Stock, each director is credited with additional DSUs and RSUs equal in value to the dividend paid on the corresponding number of shares of UTC Common Stock.

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   25

 

  COMPENSATION OF DIRECTORS  

 

2017 Director Compensation

 

Name  Fees Earned or
Paid in Cash ($)
   Stock
Awards ($)(1)
   All Other
Compensation ($)(2)
   Total ($) 
Lloyd J. Austin III  $132,000   $198,000   $8,137   $338,137 
Diane M. Bryant(3)  $0   $585,000   $2,820   $587,820 
John V. Faraci  $0   $325,000   $25,974   $350,974 
Jean-Pierre Garnier  $0   $325,000   $974   $325,974 
Edward A. Kangas  $168,000   $252,000   $974   $420,974 
Ellen J. Kullman  $0   $325,000   $30,974   $355,974 
Marshall O. Larsen  $132,000   $198,000   $1,141   $331,141 
Harold W. McGraw III  $120,000   $180,000   $974   $300,974 
Margaret L. O’Sullivan(4)  $0   $265,000   $583   $265,583 
Fredric G. Reynolds  $132,000   $198,000   $2,820   $332,820 
Brian C. Rogers  $0   $300,000   $2,820   $302,820 
Christine T. Whitman  $120,000   $180,000   $738   $300,738 

 

(1) Stock Awards consist of the grant date fair value of DSU and RSU awards credited to the director’s account, including any portion of the annual cash retainer that the director elected to receive as DSUs. The value of DSU and RSU awards has been calculated in accordance with the Compensation—Stock Compensation Topic of the FASB ASC. The assumptions made in the valuation of these awards can be found in Note 12, Employee Benefit Plans, to the Consolidated Financial Statements in Exhibit 13 to UTC’s 2017 Annual Report on Form 10-K. The number of units credited to each director in 2017 was calculated by dividing the value of the award by $116.32, the NYSE closing price per share of UTC Common Stock on April 24, 2017, the date of the 2017 Annual Meeting. Directors who joined the Board following the Annual Meeting received the number of DSUs and RSUs based on the NYSE closing price of UTC Common Stock on the date of his or her appointment. Since DSU awards vest on the grant date, but are not distributed until the director leaves the Board, the only unvested units as of December 31, 2017, are the following unvested portions of the new director RSU awards: L. Austin III, 750 units; D. Bryant, 722 units; M. O’Sullivan, 833 units; F. Reynolds, 628 units; and B. Rogers, 628 units. The aggregate number of shares subject to awards outstanding as of December 31, 2017, for each Director can be found in the table on Share Ownership on page 27.
(2) Amounts in this column include matching contributions made to eligible universities, colleges and certain other eligible nonprofit organizations under the Company’s matching gift program that covers non-employee directors as well as company employees. The Company’s matching gifts in 2017 were as follows: L. Austin III, $5,000; J. Faraci, $25,000; and E. Kullman, $30,000.
(3) Ms. Bryant was elected to the Board of Directors effective January 1, 2017. In accordance with the UTC Board’s annual retainer policy, she received 50% of the annual retainer for the April 2016 to April 2017 Board cycle, 100% of the annual retainer for the April 2017 to April 2018 Board cycle, and the new director RSU award.
(4) Dr. O’Sullivan was elected to the Board effective November 1, 2017. In accordance with the UTC Board’s annual retainer policy, she received 50% of the annual retainer for the April 2017 to April 2018 Board cycle, and the new director RSU award.

 

26   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
     

 

    SHARE    

Ownership

 

Share Ownership Requirements

 

Our robust share ownership requirements promote and strengthen the alignment of interests between our non-employee directors, management and shareowners. These requirements are:

 

6x 5x 4x 3x
base salary for the Chairman & CEO annual base cash retainer for independent directors base salary for the CFO and
business unit presidents
base salary for other ELG members

 

As previously discussed on page 5, the Compensation Committee increased the share ownership requirements for the CFO and business unit presidents during 2017 from 3x to 4x base salary. The Committee made this change because it recognizes the importance of shareowner alignment for these particular roles.

 

Non-employee directors must achieve the required ownership level within five years of joining the Board. For ELG members (including the NEOs), the applicable ownership levels must be achieved within five years of their appointment to the ELG. The sale of UTC shares is prohibited if ownership requirements are not met after the five-year period. All directors and NEOs currently comply with their ownership requirement or are on track to meet the requirement within the five-year period.

 

Share Ownership Information for Directors and Officers

 

The following table shows the number of shares of Common Stock beneficially owned as of March 2, 2018, by our current directors, NEOs, and our directors and current executive officers as a group. None of these individuals, or the group as a whole, beneficially owned more than 1% of UTC’s shares outstanding as of that date. Each person listed in the following table had sole voting and investment power of the shares shown, except as noted in the footnotes below.

 

Directors and Executive Officers  SARs Exercisable
within 60 days(1)
   RSUs Convertible
to Shares within
60 days(2)
   DSUs Convertible
to Shares within
60 days(2)
   Total Shares
Beneficially
Owned(3)
 
L. Austin III       215    3,353    3,568 
D. Bryant       202    4,319    4,521 
J. Faraci       2,301    47,219    49,520 
J. Garnier           81,965    100,075 
D. Gitlin   32,502            46,072(4) 
G. Hayes   188,787            312,387(5) 
A. Johri   51,007            90,235 
E. Kangas       2,589    37,113    39,702 
E. Kullman       1,494    16,498    17,992 
M. Larsen       1,434    15,010    21,876(4) 
R. Leduc   28,332            83,652 
R. McDonough   69,306            89,918 
H. McGraw III       3,073    49,560    56,238 
M. O’Sullivan       4    1,381    1,385 
F. Reynolds       471    4,608    18,304 
B. Rogers       471    6,939    12,410(4) 
C. Whitman       3,072    33,824    43,746 
Directors & Executive Officers as a group (23 in total)(6)(7)(8)   598,228    15,326    301,789    1,340,750 

 

(1) For the executive officers, includes the net number of shares of Common Stock issuable upon exercise of vested SARs. Following vesting, each SAR is exercisable for a number of shares of Common Stock having a value equal to the increase in value of a share of Common Stock from the date the SAR was granted through the date of exercise. For purposes of this table, the net number of shares of Common Stock issuable upon exercise has been calculated using the NYSE closing price of UTC Common Stock on the last trading day of 2017 of $127.57 per share.

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   27
 
  SHARE OWNERSHIP  

 

(2) For directors, RSUs and DSUs are settled upon resignation or retirement from the Board.
(3) The share amounts include stock units credited to the account of the executive officer under the UTC Savings Restoration Plan (“SRP”) that are attributable to Company contributions to match 60% of the officer’s payroll contributions and which are settled in shares of UTC Common Stock following retirement or separation of employment. As of March 2, 2018, the following executive officers held stock units in their SRP account: D. Gitlin, 2,118 units; G. Hayes, 7,388 units; A. Johri, 1,388 units; and R. Leduc, 1,392 units; and the current executive officers as a group held 27,571 units. In addition, the share amounts in this column reflect the shares in which the listed person or the members of the group had the right to acquire beneficial ownership at any time within 60 days after March 2, 2018, by exercising SARs and, in the case of non-employee directors, upon the settlement of RSUs or DSUs as a result of their resignation or retirement from the Board.
(4) Includes the following: 8,742 shares, 5,432 shares, and 5,000 shares of Common Stock for which the spouses of D. Gitlin, M. Larsen and B. Rogers, respectively, share voting and investment power.
(5) Includes 2,154 shares of Common Stock for which the spouse of G. Hayes holds voting and investment power.
(6) Consists of holdings of those directors and executive officers who serve in such positions as of March 2, 2018. A complete list of UTC’s executive officers is included in the Company’s Annual Report on Form 10-K for 2017.
(7) Includes 11,329 shares of Common Stock for which the spouse of an executive officer who is not an NEO shares voting and investment power.
(8) Includes 1,546 shares of Common Stock for which the spouse of an executive officer who is not an NEO holds voting and investment power.

 

Certain Beneficial Owners

 

The following table shows all holders known to UTC to be beneficial owners of more than 5% of the outstanding shares of Common Stock as of December 31, 2017.

 

Name and Address  Shares   Percent of Class 
State Street Corporation(1)   90,109,040    11.28%
State Street Financial Center          
One Lincoln Street          
Boston, MA 02111          
The Vanguard Group(2)   57,346,994    7.18%
100 Vanguard Boulevard          
Malvern, PA 19355          
BlackRock, Inc.(3)   46,850,302    5.9%
55 East 52nd Street          
New York, NY 10055          

 

(1) State Street Corporation reported in an SEC filing that, as of December 31, 2017, it held sole voting power with respect to zero shares of Common Stock, shared voting power with respect to 90,109,040 shares of Common Stock, sole dispositive power with respect to zero shares of Common Stock, and shared dispositive power with respect to 90,109,040 shares of Common Stock. State Street Corporation also reported that its wholly-owned subsidiary, State Street Bank and Trust Company, is the trustee for the UTC Common Stock in the UTC Employee Savings Plan Master Trust, which beneficially owns 6.49% of Common Stock of UTC, and that in this capacity State Street Bank and Trust Company has dispositive power and voting power over the shares in certain circumstances.
   
(2) The Vanguard Group reported in an SEC filing that, as of December 31, 2017, it held sole voting power with respect to 1,047,328 shares of Common Stock, shared voting power with respect to 168,161 shares of Common Stock, sole dispositive power with respect to 56,159,799 shares of Common Stock, and shared dispositive power with respect to 1,187,195 shares of Common Stock.
   
(3) BlackRock, Inc. reported in an SEC filing that, as of December 31, 2017, it held sole voting power with respect to 40,753,090 shares of Common Stock and sole dispositive power with respect to 46,850,302 shares of Common Stock.

 

28   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 

2

 

     
    PROPOSAL 2    

Advisory Vote

 

TO APPROVE EXECUTIVE COMPENSATION

 

                                                                        

Each year we ask shareowners to approve, on an advisory basis, the compensation of UTC’s Named Executive Officers (“NEOs”). We encourage you, before voting, to read and consider the Compensation Discussion and Analysis on pages 30-52, along with the compensation tables on pages 54-65.


 

   

 

How is Shareowner Feedback Considered?

Although your vote is advisory, UTC values and carefully considers shareowner opinions when making executive compensation decisions. Over the years, shareowner input has substantially contributed to our executive compensation program’s Guiding Principles, which can be found on page 31 of this Proxy Statement. Since our last Annual Meeting, we engaged in discussions with investors holding more than 340 million shares of UTC stock on compensation matters. The Compensation Committee uses this feedback in its annual evaluation and management of our program. Shareowner feedback is also reflected in our description of our compensation program in this Proxy Statement in order to enhance its clarity and transparency for our investors.

 

Why Should I Vote FOR This Proposal?

Our executive compensation program is structured to advance its fundamental objective: aligning our executives’ compensation with the long-term interests of UTC shareowners. We design our program to reward financial performance and effective strategic leadership, key elements in building sustainable shareowner value. The performance metrics used in our incentive plans align with shareowner interests by correlating the timing and amount of actual payouts to our short-, medium- and long-term performance. Compensation opportunities are structured to reward the appropriate balance of financial, strategic and operational business results, and to require ethical and responsible conduct in pursuit of these goals. The Board and its Compensation Committee believe that UTC’s executive compensation program has effectively aligned pay with performance, while facilitating the retention of highly talented executives who are critical to our long-term success.

 

Accordingly, the Board recommends that shareowners vote FOR the following resolution:

 

“RESOLVED, that the compensation of UTC’s Named Executive Officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, compensation tables and related information provided in this Proxy Statement, is hereby APPROVED on an advisory basis.”

 

As a matter of law, the approval or disapproval of this Proposal 2 may not be construed as overruling any decision by UTC or the Board, or as imposing any duty or obligation on UTC, the Board or any individual director.

 

The Board of Directors recommends
a vote FOR this proposal.
  FOR

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   29
 
     

 

    COMPENSATION   

Discussion and Analysis

 

  2017 NAMED EXECUTIVE OFFICERS
       
  GREGORY J. HAYES   ROBERT J. MCDONOUGH
  Chairman & CEO   President, UTC Climate, Controls & Security (“CCS”)
       
  AKHIL JOHRI   ROBERT F. LEDUC
  Executive Vice President &
Chief Financial Officer
  President, Pratt & Whitney
       
  DAVID L. GITLIN    
  President, UTC Aerospace Systems (“UTAS”)    


 

                                                                        

In this section, we discuss our compensation philosophy, and describe our executive compensation program and how it is structured to advance our fundamental objective of aligning our executives’ compensation with the long-term interests of UTC shareowners. We explain how the Compensation Committee of the Board (the “Committee”) determines compensation for the members of our Executive Leadership Group (“ELG”), including the NEOs listed above. This discussion also explains the Committee’s rationale for specific 2017 pay decisions.

   

 

Executive Summary

 

Investor Engagement

 

2017 SHAREOWNER OUTREACH EFFORTS

We actively seek and highly value feedback from shareowners and their advisors. The Committee annually considers this feedback, along with factors such as external market data and staff and consultant recommendations, in its ongoing assessment of the effectiveness of our program.

 

 

RESPONSE TO 2017 SAY-ON-PAY VOTE

Each year we consider the results of our advisory vote on executive compensation (“Say-on-Pay”) from the prior year. In 2017, 97% of the votes cast (excluding abstentions and broker non-votes) voted in favor of the Committee’s 2016 executive compensation decisions, a result that slightly exceeded the 96% favorable vote we received in 2016. We interpreted this result, along with our positive five-year voting trend, as an endorsement of our compensation program’s design and direction.

 

2017 SHAREOWNER FEEDBACK

This past year, shareowners also expressed support for our recent executive compensation program changes, which are discussed in detail in this Proxy Summary on page 5.

 

30   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

Our Executive Compensation Philosophy

The Committee believes there must be a meaningful link between the compensation paid to our executives and our goal of long-term, sustainable growth for our shareowners. This core philosophy is embedded in the following principles, which guide all aspects of our compensation program:

 

UTC’S GUIDING PRINCIPLES FOR EXECUTIVE COMPENSATION 

 

Competitiveness Long-Term Focus Balance
Total compensation should be sufficiently competitive to attract, retain and motivate a leadership team capable of maximizing UTC’s performance. Each element should be benchmarked relative to peers. For our most senior executives, long-term, stock-based compensation opportunities should significantly outweigh short-term, cash-based opportunities. Annual objectives should complement sustainable, long-term performance. The portion of total compensation contingent on performance should increase with an executive’s level of responsibility. Annual and long-term incentive opportunities should reward the appropriate balance of short-, medium- and long-term financial, strategic and operational business results.
 
Pay-for-Performance Responsibility Shareowner Alignment
A substantial portion of compensation should be variable, contingent and directly linked to individual, company and business unit performance. A complete commitment to ethical and corporate responsibility is a fundamental principle incorporated into all aspects of our compensation program. Compensation should take into account each executive’s responsibility to act at all times in accordance with our Code of Ethics and our environmental, health and safety objectives. Financial, strategic and operational performance must not compromise these values. The financial interests of executives should be aligned with the long-term interests of our shareowners through stock-based compensation and performance metrics that correlate with long-term shareowner value.

 

Principal Components of Compensation

The following table summarizes the principal components of our executive compensation program for 2017. The Committee structures these elements to promote and reward superior financial performance through a variety of performance metrics and time horizons. For additional details on each of these components refer to pages 37-41.

 

    Time Horizon        
Pay Component   (in years)   Performance   Purpose
Base Salary     Individual achievement   Attract and retain
Annual Bonus     Earnings    
        Free cash flow to net income ratio*   Drive near-term performance goals
        Individual achievement    
Performance Share Units     Adjusted earnings per share    
        Return on invested capital   Drive medium-term performance goals
        Total shareowner return vs. S&P 500    
        Share price appreciation    
Restricted Stock Units     Share price appreciation   Retention
Stock Appreciation Rights     Share price appreciation   Drive long-term share price appreciation

 

*The Committee changed the cash flow metric beginning with the 2018 annual bonus program to an absolute free cash flow goal, as described on page 5.

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   31
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

2017 Performance

Our senior leadership team continued its focus on our key priorities — innovation, cost reduction, execution and disciplined capital allocation. The following 2017 accomplishments reflect our commitment to these priorities, which we believe drive long-term, sustainable growth.

 

FINANCIAL ACCOMPLISHMENTS*

In 2017, we met or exceeded all of the key financial targets we communicated to investors for the year, including achieving diluted EPS of $5.70 (GAAP) and $6.65 (non-GAAP). Sales increased by 5%, which included organic sales growth of 4% —our best performance since 2014. We also generated $5.6 billion of cash flow from continuing operations and free cash flow of $3.6 billion, while returning $3.5 billion to shareowners through a combination of dividends and share buybacks and contributing $1.9 billion to fully fund our qualified U.S. pension plans (as of December 31, 2017).

 

GAAP FINANCIAL MEASURES*   NON-GAAP FINANCIAL MEASURES*
NET SALES (in billions)   ADJUSTED NET SALES (in billions)
   
DILUTED EPS ($ per share)   ADJUSTED DILUTED EPS ($ per share)
 
CASH FLOW FROM OPERATIONS (in billions)   FREE CASH FLOW (in billions)
 
NET INCOME (in billions)   ADJUSTED NET INCOME (in billions)
 

 

*Please refer to Appendix A on pages 90-91 for additional information regarding these GAAP and non-GAAP financial measures.

 

32   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

DIVIDENDS PAID (PER COMMON SHARE) 

 

 

81st $3.5 billion 3.8% increase 19% TSR
consecutive year we paid dividends to shareowners paid in 2017 to investors through dividends and share buybacks in dividends per share paid to shareowners delivered to our shareowners during 2017

 

SHAREOWNER VALUE

Our executive compensation program is designed to drive long-term shareowner value and incentivize strategic investments and operational decisions that contribute to long-term growth in earnings and total shareowner return. In the three years since Mr. Hayes became CEO, UTC has made substantial investments in each of our business units. For example, we brought the Pratt & Whitney GTF engine to market and are shipping an increasing number of engines to our customers. We are building the world’s premier aerospace systems business through a combination of mergers and acquisitions and steady organic growth. We are investing in new digital technologies for Otis products and aftermarket services. CCS has launched a wide array of innovative new products that promote safer, smarter and more sustainable buildings. Our long-term business investments are paying off.

 

We believe there is a solid foundation in place for years of strong earnings growth across UTC’s businesses and, as a result, investor sentiment and TSR continue to improve. This can be seen in UTC’s 19% TSR performance in 2017, even during the heavy investment cycle of the last several years. The following chart illustrates UTC’s TSR compared to our Compensation Peer Group (“CPG”) and other major market indices over varying time periods.

 

TOTAL SHAREOWNER RETURN: UTC COMPARISONS* 

 

 

 

* TSR values are provided by S&P Capital IQ and are calculated on an annualized basis as of December 29, 2017. The CPG composite returns are determined by calculating the TSR for each peer company, then a weighted average is applied based on each company’s market capitalization at the beginning of the measurement period.

 

STRATEGIC ACCOMPLISHMENTS

Rockwell Collins Acquisition. In 2017, we reached a definitive agreement to acquire Rockwell Collins for $30 billion (including $7 billion in assumed net debt). We believe that the combined businesses — which have highly complementary capabilities — will better position UTC to deliver more innovative products and services, compete more effectively for future business, and provide greater value to our customers and shareowners.

 

United Technologies Digital Accelerator. Another milestone in 2017 was the launch of the UT Digital Accelerator in Brooklyn, New York, where our business and technology talent collaborate to expand the digital capabilities that we believe will enhance our products, improve our services and unlock efficiencies. To best utilize advanced digital capabilities, we have

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   33
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

selected several initiatives in areas critical to our business success: customer experience, service transformation, asset intelligence and smart factories. These initiatives will enable us to rapidly expand new product experiences so we can meet the demands of the fast-paced, technology-driven economy with greater agility and flexibility.

 

How 2017 Performance Affected Incentive Payouts

 

UTC(1)  Threshold  Target  Maximum  Actual  Payout Factor
2017 Annual Bonus(2)               
Earnings (net income)  $4.6 billion  $5.1 billion  $5.6 billion  $5.3 billion  138%
Free Cash Flow to Net Income Ratio  50%  90%  150%  99%(3)  115%
Committee Approved UTC Financial Performance Factor  122%(4)
2015-2017 Performance Share Units               
EPS Growth  3%  6%  9%  1%  0%
TSR vs. S&P 500  37.5th  50th  75th  39.2nd  57%
Committee Approved Payout Factor  28%
   
(1) Performance goals and results are based on non-GAAP financial measures.
(2) Reflects annual bonus goals and results for the UTC financial performance factor. Refer to pages 38-39 for more details.
(3) The free cash flow to net income ratio of 99% that was used for annual bonus purposes was adjusted for certain non-recurring items, as discussed in more detail on page 39.
(4) The Committee used its discretion and reduced the calculated payout factor from 129% to 122%. For more details on how UTC’s financial results are adjusted for incentive plan purposes, refer to page 39.

 

How We Make Pay Decisions and Assess Our Programs

 

WHO DOES WHAT 

 

Compensation Committee

Oversees our programs

 

  Sets financial, strategic and operational goals and objectives for the Company, the business units and the CEO.

 

  Sets performance goals for the annual and long-term incentive programs.

 

  Assesses Company, business unit and NEOs’ performance relative to the pre-established goals and objectives set for the year.

 

  Approves CEO pay adjustments.

 

  Reviews the CEO’s recommendations for each ELG member’s and executive officer’s pay and makes adjustments it deems appropriate.

 

  Evaluates the competitiveness of each ELG member’s and executive officer’s total compensation package.

 

  Approves all executive compensation program design changes, including severance, change-in-control and supplemental benefit arrangements.

 

•  Considers input from UTC’s shareowners regarding executive compensation decisions and policies.

 

  All decisions are subject to review by the other independent directors.

CEO

Provides selective input to the Committee

 

  Considers the performance of each ELG member, his or her business unit and/or function, market benchmarks and retention risk when determining pay recommendations.

 

  Presents the Committee with recommendations for each principal element of compensation for ELG members (including each of the NEOs).

 

  Does not have any role in the Committee’s determination of his own compensation.

   

Management and Consultant

Provides insight and assistance

 

The Executive Vice President & Chief Human Resources Officer, along with UTC’s Human Resources staff and the independent compensation consultant, provide insights on program design and compensation market data to assist the Committee with its decisions. Management also has been delegated oversight responsibility of executive compensation plan administration.

Shareowners

Provide feedback on our programs

 

In assessing our programs each year, the Committee reviews the feedback received from shareowners. This feedback, along with other factors, helps the Committee in its decisions and its ongoing assessment of the effectiveness of our program.

 

34   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

Role of Independent Compensation Consultant

The Compensation Committee retained Pearl Meyer & Partners (“Pearl Meyer”) to serve as its executive compensation consultant for 2017. Pearl Meyer may make recommendations on the form and amount of compensation, but the Committee makes all decisions regarding the compensation of our NEOs and other ELG members.

 

During 2017, Pearl Meyer advised the Committee on a variety of subjects, including compensation plan design and trends, pay-for-performance analytics, benchmarking data and related matters. Pearl Meyer reports directly to the Committee, participates in meetings as requested and communicates with the Committee Chair between meetings as necessary. A Pearl Meyer representative attended five meetings in 2017.

 

Prior to engaging Pearl Meyer, the Committee reviewed the firm’s qualifications, independence and any potential conflicts of interest. Pearl Meyer does not perform other services for or receive other fees from UTC (except for an incidental amount of $8,400 in 2017 for participation in certain business surveys). The Committee therefore determined that Pearl Meyer qualified as an independent consultant. The Committee has the sole authority to modify or approve Pearl Meyer’s compensation, determine the nature and scope of its services, evaluate its performance, terminate the engagement, and hire a replacement or additional consultant at any time.

 

The Committee also uses market data from other compensation consulting firms for benchmarking and other purposes. However, this benchmark data is generally available broadly to these firms’ other consulting clients. No other consulting firm made recommendations to the Committee or management on peer group composition or on the form, amount or design of executive compensation in 2017.

 

Our Compensation Peer Group

How We Use Peer Group Data. We compare our executive compensation program to those at the 23 companies that make up our Compensation Peer Group (“CPG”). Data from a broader range of companies, including the Fortune 100, are used for insight into general compensation trends and to supplement CPG data when necessary and appropriate. To maintain a sufficiently competitive executive compensation program, the Committee believes the target value of each principal element of compensation should approximate the market median of the companies UTC views as competitors for executive talent. The Committee annually evaluates each compensation element relative to the market for each ELG member’s role and makes adjustments as necessary. However, individual compensation may vary from market median benchmarks based on the Committee’s assessment of Company, business unit/function and individual performance, job scope, retention risk, tenure and other factors that it determines to be relevant to its evaluation.

 

How Our Compensation Peer Group is Constructed. The CPG’s composition reflects a mix of both industry and non-industry peers that the Committee views as competitors for senior executive talent. Like UTC, 12 of these 23 companies are Dow Jones Industrial Average components. In determining the most appropriate peer group composition, the Committee considers factors such as revenue, market capitalization, global scope of operations, manufacturing footprint, research and development activities, and diversified product portfolios. In its 2017 review, the Committee made no adjustments to the CPG. However, two of the CPG companies (DuPont and Dow Chemical) merged into one company during the year, reducing the number of CPG companies from 24 to 23. The Committee believes the companies in the CPG provide a relevant comparison based on their similarity to UTC in size and operational complexity. The CPG is constructed to serve the specific purpose of benchmarking executive compensation. For this reason, we do not use the relative financial performance of the CPG as a performance metric in our incentive compensation programs.

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   35
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

OUR COMPENSATION PEER GROUP 

 

Companies in Blue represent Dow Jones Industrial Average components.

 

Aerospace & Defense

 

Boeing

General Dynamics
Lockheed Martin
Northrop Grumman
Raytheon

Equipment & Machinery

 

3M
Caterpillar

Deere
Eaton
Emerson Electric
Johnson Controls

Technology/
Communications

 

AT&T

Cisco
IBM
Verizon

Consumer Packaged
Goods

 

Johnson & Johnson
Procter & Gamble

Oil & Gas

 

Chevron

         
         

Chemicals

 

DowDuPont

Diversified Industrials

 

General Electric

Honeywell

Automotive

 

General Motors

Pharmaceuticals

 

Pfizer

 
         
 

 

PEER GROUP DATA* 

 

      Market     
   Net Sales  Capitalization     
   (in billions)  (in billions)  Employees  
25th Percentile  $30.2  $56.2  80,259  
50th Percentile  $48.0  $140.0  98,200  
75th Percentile  $93.4  $202.8  128,500  
UTC  $59.8  $101.9  204,651  
UTC Rank  59th  43rd  96th  
   
* Peer company data is provided by S&P Capital IQ. Net sales and employee data reflect the most recent publicly available information (as of February 19, 2018). Net sales are based on continuing operations, as reported, in accordance with U.S. GAAP financial reporting standards. Market capitalization for peer companies is calculated based on shares outstanding as of December 31, 2017.

 

Timeline For Compensation Decisions

 

The Committee followed the process below to make 2017 annual pay decisions for each of the principal components of compensation:

 

February 2017 April 2017 December 2017 January 2, 2018 February 2018 1st Quarter
of 2018
           
2017 base salary
adjustments were
approved
2017 base salary
adjustments took
effect
Review of preliminary
Company/business
unit/individual
performance
2018 LTI awards
granted
Review of final
2017 Company/
business unit/individual
performance
Payment of
2017 annual
bonuses
           
    2018 LTI award
levels were approved
  Financial performance
factors and individual
payout levels for
annual bonuses were
approved
 

 

36   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

Our Principal Elements of Compensation

 

Base Salary

To attract and retain talented and qualified executives, we provide competitive base salaries, which we target at the market median. Each year, the Committee reviews the CEO’s recommendations for base salary adjustments for ELG members relative to peer market data for similar roles. The Committee has complete discretion to modify or approve the CEO’s recommendations. The CEO has no involvement in the Committee’s determination of his base salary. Actual salaries may vary from market medians based on factors such as job scope and responsibilities, experience, tenure, individual performance, retention risk and internal pay equity.

 

Annual Bonus

OUR OBJECTIVES

The Committee believes its methodology for determining annual bonus awards accomplishes the following objectives:

 

Sets financial performance goals that are consistent with the Committee’s assessment of the opportunities and risks for the upcoming year, as communicated to investors.
   
Establishes challenging but achievable performance goals for our executives.
Provides incentive opportunities that are market competitive.
   
Allows the Committee to make discretionary adjustments if it determines that actual performance does not fully align with its assessment of overall performance.


 

ANNUAL BONUS TARGETS

The Committee approves annual bonus target levels based on relevant market data for each ELG member’s role. Target levels are expressed as a percentage of an executive’s base salary and generally approximate the market median. The 2017 annual bonus targets for each NEO are shown below:

 

NEO  ANNUAL BONUS TARGET
   
Gregory Hayes 175%
Akhil Johri 100%
David Gitlin 100%
Robert McDonough 100%
Robert Leduc 100%

 

SETTING FINANCIAL PERFORMANCE METRICS AND GOALS FOR 2017

For 2017, the Committee established annual performance goals for two financial metrics: earnings and the ratio of free cash flow to net income (“FCF/NI”) at threshold, target and maximum goal levels. Performance relative to these pre-established goals determines the financial performance factors for UTC and each business unit.

 

The charts below show the weighting of each financial metric. UTC’s financial performance factor determines the annual bonus pool for Corporate Office executives, while a blend of the UTC factor and business unit-specific financial performance factors are used to determine the pool for business unit executives.

 

UTC FINANCIAL PERFORMANCE FACTOR    BUSINESS UNIT FINANCIAL PERFORMANCE FACTORS 
     
 

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   37
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

BACKGROUND ON FINANCIAL PERFORMANCE METRICS AND GOALS 

 

 

    UTC Earnings   UTC FCF/NI   Business Unit Earnings   Business Unit FCF/NI
How are performance metrics defined for annual bonus purposes?   Adjusted net income(1)   UTC FCF/NI ratio(1)   Growth in adjusted earnings before interest and taxes (“EBIT”) at constant currency(1)   Business unit FCF/NI ratio(1)
Why has the Committee selected these metrics?   The Committee believes that adjusted net income is an appropriate UTC-wide goal because it includes the impact of items such as tax, interest and foreign exchange fluctuations, which are managed at the Corporate level and thus relevant to assessing UTC’s overall performance.   The Committee believes that cash flow performance is a relevant measure of the overall quality and sustainability of earnings.   The Committee believes operating earnings growth, exclusive of tax, interest and foreign exchange exposure, should be the focus of business unit performance.   The Committee believes that cash flow performance is a relevant measure of the overall quality and sustainability of earnings.
Why does the Company use adjusted(2) financial performance goals for annual bonus purposes?   The Committee believes annual bonuses should not be positively or negatively impacted by short-term decisions made in the best interest of UTC’s long-term business strategies. Making such adjustments encourages decision-making that considers long-term value creation that does not conflict with short-term incentive metrics. In addition, we communicate adjusted financial goals to our investors; therefore, using adjusted financial goals align short-term compensation opportunities directly with investor expectations.
How does the Committee set performance goals?   An adjusted net income goal is set to correspond to the expected EPS range communicated to investors for the year.   The UTC FCF/NI goal is set to align with the performance expectations communicated to investors for the year.   Adjusted EBIT goals contribute to the overall net income goal set for the Corporation and reflect each business unit’s anticipated opportunities and challenges for the upcoming year.   FCF/NI goals are set to contribute to the UTC FCF/NI goal and to align with each business unit’s strategic business plan for the year.
What goals did the Committee set for 2017?   $5.1 billion adjusted net income goal was approved by the Committee. This amount corresponds to an adjusted EPS of $6.50 and falls within the EPS range communicated to investors for the year.   90% FCF/NI ratio goal.   Business unit adjusted EBIT goals ranged from -12% to 6%.   Business unit FCF/NI ratio goals ranged from 85% to 105%.
   
(1) Refer to Appendix B on page 92 for a detailed definition on how we calculate earnings and FCF/NI for the purposes of determining the UTC and business unit financial performance factors.
   
(2) See Appendix A on pages 90-91 for details on non-GAAP financial measures.

 

PAYOUT RANGES

Payouts begin at 50% of target (for threshold-level performance) and are capped at 200% (for maximum-level performance). There are no payouts for below threshold-level performance and at no point can the Committee approve payouts above 200% of target.

 

UTC Earnings Goal  Threshold  Target  Maximum  
Net Income (as a % of target)  90%*  100%*  110%*  
Payout (as a % of target)  50%  100%  200%  
            
UTC FCF/NI Goal  Threshold  Target  Maximum  
FCF/NI Ratio  50%  90%  150%  
Payout (as a % of target)  50%  100%  200%  
   
* Earnings goals are set based on dollar values, rather than as a percentage of target as shown. Threshold and maximum performance levels (as a percent of target) for the business units may vary slightly from those set for the UTC financial performance factor.

 

38   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

HOW 2017 FINANCIAL PERFORMANCE RESULTS LED TO THE FINANCIAL PERFORMANCE FACTORS 

 

    UTC Earnings   UTC FCF/NI   Business Unit Earnings   Business Units FCF/NI
What were the 2017 financial results used to determine the financial performance factors?   Adjusted 2017 net income was $5.3 billion.   UTC’s free cash flow was 79% of net income, which was adjusted to 99% for annual bonus purposes to exclude a significant pension contribution, tax items, and other gains and losses unrelated to operational performance.   Adjusted business unit EBIT ranged from -9% to 4%.   FCF/NI results for the business units ranged from 94% to 125%.
What were the payout factors for each metric?   138% of target.   115% of target.   Ranged from 75% to 123% of target.   Ranged from 95% to 161% of target.
What were the calculated financial performance factors?   The weighted earnings and FCF/NI payout factors resulted in a blended UTC financial performance factor of 129% of target.   After incorporating the UTC factor, the weighted earnings and FCF/NI payout factors resulted in blended financial performance factors for the business units ranging from 102% to 135% of target.
Did the Committee make any adjustments to the calculated financial performance factors?   The Committee reduced the calculated UTC financial performance factor from 129% to 122% of target, to account for an unfavorable customer contract adjustment that it deemed relevant to assessing the overall performance of the Company. See “Committee’s Use of Discretion in Annual Bonus Awards” below for more details.   The Committee reduced some of the business units’ calculated financial performance factors to account for items it deemed relevant to assessing overall performance, such as adverse contract adjustments and product recalls. After these adjustments, the business unit factors ranged from 98% to 114% of target. See “Committee’s Use of Discretion in Annual Bonus Awards” below for more details.

 

POOL DETERMINATION

Annual bonus pools are calculated by multiplying each executive’s annual bonus target value (base salary x target bonus percentage) by the final UTC or business unit financial performance factor, as applicable. These amounts are aggregated to determine award pools for Corporate Office executives and each business unit and are subsequently allocated among eligible executives based on individual performance.

 

INDIVIDUAL PERFORMANCE

Our NEOs begin the year with individual financial, strategic and operational objectives. Based on the CEO’s assessment of each NEO’s performance, he may recommend that the Committee make a discretionary adjustment to increase or decrease the annual bonus calculated using the applicable financial performance factor. The Committee considers these recommendations and makes adjustments as it deems appropriate. Mr. Hayes has no role in the Committee’s determination of his own annual bonus.

 

COMMITTEE’S USE OF DISCRETION IN ANNUAL BONUS AWARDS

As previously discussed, the annual bonus program is designed to closely align individual payouts with performance relative to pre-established goals. However, the Committee retains the authority to make upward or downward adjustments if it determines that Company, business unit and/or individual performance measured by the metrics do not accurately reflect the overall quality of performance for the year. Although the achievement of financial performance goals remains the primary basis for determining actual annual bonus amounts, the Committee has made positive and negative discretionary adjustments in the past to both financial performance factors and as a result of individual performance. Examples of situations that could result in discretionary adjustment include:

 

Material, unforeseen circumstances beyond Management’s control that affected financial performance results relative to the established goals or certain non-recurring charges or credits unrelated to operating performance;
   
Tax or accounting rule adjustments that positively or negatively impact performance;
Changes to the Company’s capital structure;
   
An executive’s performance relative to specific individual objectives; or
   
An executive’s failure to adhere to UTC’s Code of Ethics, Enterprise Risk Management program or other Company policies.
   


 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   39
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

Long-Term Incentive Awards

Each year the Committee reviews the design of our LTI awards to ensure consistency with our program’s fundamental objectives of aligning the interests of executives and shareowners while attracting and retaining talented senior leaders. LTI awards are subject to three-year, service-based (and in some cases performance-based) vesting requirements, with limited exceptions for death, disability, retirement, change-in-control and certain qualifying involuntary terminations.

 

TYPES OF LTI VEHICLES

As discussed on page 5, the Committee added RSUs to the NEOs’ LTI mix for 2017 to enhance the retentive value and to better align our program with market norms. NEOs received their 2017 award in the LTI vehicles shown in the chart below.

 

NEO LTI MIX 

 

The number of PSUs, SARs and RSUs awarded to each NEO is based on a total award value approved by the Committee. The Committee may also, from time to time, approve special equity grants for purposes such as recruitment, retention and recognition, or to drive the achievement of specific strategic performance goals. These special grants may be in the form of PSUs, SARs, RSUs, restricted stock or performance-based SARs. In 2017, the Committee granted Mr. Gitlin a special retention RSU award reflecting his increasing leadership demands and integration challenges in connection with the announced acquisition of Rockwell Collins.


 

PERFORMANCE SHARE UNITS

PSUs vest at the end of a three-year performance period if, and to the extent that, the Company achieves performance goals established by the Committee. Each PSU converts into one share of Common Stock upon vesting. Unvested PSUs do not earn dividend equivalents. PSUs are designed to deliver market median compensation at target levels of performance. Below- or above-target performance levels will result in variations from market median payouts.

 

Performance Metrics and Goals for the 2017-2019 PSUs. PSUs granted in 2017 will vest based on UTC’s performance relative to the performance goals described below over a three-year performance period. Vesting is calculated separately for each metric.

 

EARNINGS PER SHARE GROWTH (“EPS”) 

 

EPS Growth (weighted 35%)

 

Three-year EPS compound annual growth rate goal was set at 3%.
   
Aligns with our mid-range strategic business plan.
   
Reflects what the Committee believes is a challenging yet attainable target.


 

RETURN ON INVESTED CAPITAL (“ROIC”) 

 

Return on Invested Capital (weighted 35%)

 

ROIC goal was set at 10.5%.
   
ROIC is calculated using a quarterly average over the three-year performance period.
   
Goals are set to exceed our weighted average cost of capital.
   
Incentivizes our executives to make disciplined capital allocation decisions.


 

40   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

TOTAL SHAREOWNER RETURN (“TSR”) VS. S&P 500 

 

Relative TSR (weighted 30%)

 

Cumulative three-year TSR goal was set at the 50th percentile relative to the companies within the S&P 500 Index.
   
Vesting does not occur if UTC’s TSR ranks below the 25th percentile, and is capped at 200% of target if TSR reaches the 75th percentile.
   
If UTC’s three-year TSR is negative, the payout for this portion of the award is capped at 100% of target regardless of UTC’s relative performance vs. the S&P 500.


 

Why We Compare UTC’s TSR to the TSR of the Companies within the S&P 500 Index. The Committee believes that comparing UTC’s TSR to the companies within the S&P 500 provides an appropriate benchmark for measuring our share price performance as a large capitalization company. The Committee does not set TSR goals relative to the performance of the CPG (see page 36 for more details on our peer group) because the CPG is used solely for the purpose of measuring the competitiveness of our executive compensation program. The Committee believes the S&P 500 provides a more comprehensive and relevant comparison for our share price performance and, unlike the CPG, is not a self-selected, customized benchmark.

 

What the Committee Considers when Setting Performance Goals. When setting financial performance goals for our PSU awards, the Committee considers various long-term business factors, including, but not limited to: planned share buybacks, macroeconomic market trends, pension headwinds/tailwinds and cost reduction plans. Certain items such as unplanned share buybacks, restructuring charges, and other non-recurring and non-operational items may be excluded from performance results, as necessary, to maintain the validity of the targets as originally formulated. See Appendix B on page 92 for a definition of how we calculate these metrics.

 

PSU Vesting (2015-2017 Performance Period). PSU awards granted on January 2, 2015, were subject to vesting based on UTC’s performance relative to pre-established EPS growth and relative TSR goals, each weighted at 50%. 2017 GAAP EPS of $5.70 was adjusted to $6.65 for PSU vesting purposes to account for the impact of restructuring, non-recurring, and other significant items unrelated to operational performance (see Appendix A on pages 90-91 for details on GAAP and non-GAAP financial measures). This resulted in a 1% compound annual EPS growth rate, which fell below the threshold performance level and resulted in an EPS payout factor of 0%. UTC’s three-year cumulative TSR performance was at the 39.2nd percentile of the S&P 500, generating a TSR payout factor of 57%. When weighted, the combined payout factors resulted in the PSUs vesting at 28% of target.

 

STOCK APPRECIATION RIGHTS

SARs entitle the award recipient to receive, at the time of exercise, shares of UTC Common Stock with a market value equal to the difference between the market price of UTC Common Stock on the date the SARs are exercised and the exercise price that was set at the grant date (i.e., the closing price of UTC Common Stock on the date of grant). SARs vest and become exercisable after three years and expire 10 years from the grant date.

 

SAR awards directly link NEO compensation to share price appreciation thereby aligning shareowner and executive interests. The Committee believes the 10-year term of these awards incentivize long-term shareowner value creation and has been a driving force behind UTC’s strong 10-year TSR performance.

 

RESTRICTED STOCK UNITS

In 2017, our ELG (including each of our NEOs) received 20% of their total LTI grant in the form of RSUs. The Committee believes the introduction of RSUs into the LTI mix better aligns UTC with peers and further balances our program by adding a time-based vesting vehicle that enhances retention.

 

RSUs vest three years from the grant date and earn dividend equivalents during the vesting period that are reinvested as additional RSUs each time UTC pays a dividend to shareowners. The reinvested RSUs vest on the same date as the underlying RSUs.

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   41
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

CEO Pay Overview

 

CEO PAY FOR 2017 

 

$1.5M $3.3M 175% target $12.0M
base salary annual bonus annual bonus LTI
no change in 2017 closely aligns with the 122% UTC performance factor used for the Corporate Office increased from 165% of base salary to better align bonus opportunities with the market median January 2018 LTI grant aligns with the market median

 

Total Direct Compensation

 

Unlike the amounts reported in the Summary Compensation Table, total direct compensation represents the annual pay decisions by the Committee that specifically reflect its assessment of Company, business unit and individual performance for 2017. For example, total direct compensation includes the grant date fair value of LTI awards granted in January 2018 because these awards reflect the Committee’s assessment of 2017 performance. The Summary Compensation Table, however, shows the grant date fair value of LTI awards granted in January 2017, which related to the Committee’s assessment of 2016 performance. Other elements included in the Summary Compensation Table — changes in pension values and other formulaic compensation components — are not related to performance and are outside the scope of the Committee’s annual pay decisions and, accordingly, are excluded from total direct compensation. The Committee therefore believes that total direct compensation renders a more accurate and up-to-date reflection of its assessment of 2017 performance.

 

 

42   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

Pay Decisions for the CEO


  GREGORY J. HAYES  

 

Chairman & Chief Executive Officer

 

AGE 57 | UTC EXPERIENCE 28 YEARS

 

         

TOTAL DIRECT COMPENSATION:

$16.84M

 

 

The Committee assessed Mr. Hayes’ 2017 performance favorably. Under his leadership, UTC successfully executed its 2017 financial, strategic and operational objectives.

 

Base Salary. Mr. Hayes’ base salary remained at $1.5 million for 2017.

 

Annual Bonus. UTC’s 2017 annual bonus factor is determined based on net income and free cash flow performance against pre-established goals. 2017 adjusted net income of $5.3 billion exceeded the $5.1 billion goal, resulting in a payout factor of 138% for the earnings metric. The ratio of free cash flow to net income used for annual bonus purposes equaled 99%, compared to the 90% goal. This resulted in a 115% payout factor for the UTC cash flow metric. In combination, these results generated a 129% UTC financial performance factor. However, as discussed on page 39, the Committee reduced this factor to 122%.

 

The Committee utilized this factor, along with favorable individual performance, explained in part by the considerations noted here, and awarded Mr. Hayes a $3.3 million annual bonus. This amount closely aligns with the Company’s 122% factor.

 

LTI. Mr. Hayes’ 2018 long-term incentive award of $12.0 million reflects the Committee’s favorable assessment of his 2017 performance, exceeds the value of his 2017 grant and aligns with the CPG median for his role.

INDIVIDUAL PERFORMANCE HIGHLIGHTS

 

Delivery of solid financial performance in 2017, including EPS of $5.70 (GAAP) and $6.65 (non-GAAP). In addition sales growth was 5%, including organic sales of 4%–our strongest since 2014.
Visionary leadership which led to UTC’s agreement to acquire Rockwell Collins for $30 billion, one of the largest aerospace acquisitions in history and intended to better position UTC for the future.
Commitment to achieving gender parity in UTC’s senior leadership roles by 2030, evidenced by UTC joining the Paradigm for Parity coalition.
Support for investments in innovation through the launch of the UT Digital Accelerator in Brooklyn, New York, and the creation of UT Digital, a new organization that aims to expand our digital capabilities and optimize our software development process.
Effectively driving a high-performance culture while emphasizing ethical standards, transparency and corporate responsibility.


 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   43
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

How We Assess Pay-for-Performance

 

The Summary Compensation Table on page 54 provides annual compensation data presented in accordance with the Securities and Exchange Commission’s (“SEC”) requirements. While helpful for cross-company comparisons, this SEC-mandated format uses accounting conventions to estimate values of long-term incentive awards at the time of grant. As might be expected, these estimated values can differ significantly from the actual value that is ultimately earned from these awards. The Committee believes this format does not adequately measure CEO compensation for the purposes of assessing pay-for-performance alignment. Therefore, the Committee also considers realizable and realized compensation in its evaluation of CEO pay-for-performance, as described in detail below.

 

Summary Compensation Table   Realizable Compensation   Realized Compensation
Basic concept        
Uses SEC methodology, which includes a mix of both compensation actually earned during the year and some future contingent pay opportunities.   3-year average compensation measure that captures how UTC’s year-end stock price affects the “in-the-money”(1) value of previously granted equity awards.   Includes only pay actually earned during the year, including any gains realized on equity awards that were granted in prior years.
         
Purpose        
         
SEC-mandated compensation disclosure.   Used to evaluate pay-for-performance alignment by correlating the value of an executive’s long-term incentive awards with the returns our shareowners receive from investing in UTC stock over the same period.   Used to evaluate pay-for-performance alignment by focusing on the strength of the correlation between UTC’s performance and the actual cash and equity payouts earned by our CEO during the year.
How it is calculated        
         
Sum of:   Three-Year Average of:   Sum of:
         
   

 

Future pay opportunities that may or may not be realized.
(1) Defined as the difference between the closing stock price of UTC Common Stock at the end of the fiscal year and the exercise price of the award (if any) multiplied by the number of shares underlying equity awards. For PSU awards for which the vesting factor is not yet known, the target number of shares is used.
(2) Includes personal use of the Corporate aircraft, leased vehicle expenses, financial planning, security benefits, healthcare benefits and other miscellaneous items.
(3) Includes insurance premiums and Company contributions to nonqualified deferred compensation plans and defined contribution retirement plans.

 

44   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

The following charts compare the Summary Compensation Table values reported for Mr. Hayes for the past three years to his realizable and realized compensation for the same period. These methodologies provide the Committee with relevant measures to assess the pay-for-performance relationship by focusing on the strength of the correlation between UTC’s one-year TSR and compensation realizable and realized during these time periods.

 

The charts below show a strong correlation between TSR and realizable and realized compensation. For 2017, the correlation between TSR and realized compensation was less pronounced than in prior years. This was driven by a significant decrease in Mr. Hayes’ SAR exercise activity during the year as well as the 2014 PSU award, which vested in 2017 at 0%. While the value realized from SAR exercises generally aligns with stock price appreciation, the executive ultimately decides when to exercise. As a result, this timing does not always correlate precisely with TSR performance.

 

Nevertheless, the Committee believes that the design of our executive compensation program, with its significant focus on “at risk” pay, reinforces its key objectives of driving long-term shareowner value, aligning executive and shareowner interests and rewarding pay-for-performance.

 

CEO PAY-FOR-PERFORMANCE TREND 

 

SUMMARY COMPENSATION
TABLE (millions)
  REALIZABLE COMPENSATION*
(millions)
  REALIZED COMPENSATION*
(millions)
  TOTAL SHAREOWNER RETURN
(one-year)
             
     

 

* Refer to the table on page 44 to see how we calculate realizable and realized compensation.

 

 

 

 

 

 

 

 

Our program’s fundamental objective is driving long-term shareowner value, aligning executive and shareowner interests and rewarding pay-for-performance.

 

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   45
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

Pay Decisions for the Other NEOs

 

The Committee makes annual compensation decisions for our NEOs based on both their individual performance and the overall performance of the Company (and the business unit and/or function, where applicable). The following pages show each NEO’s 2017 total direct compensation values. As discussed on page 42, total direct compensation includes only those pay elements that relate to the Committee’s assessment of 2017 performance (i.e., it includes 2018 LTI grants that reflected 2017 performance, rather than 2017 LTI grants that reflected 2016 performance). We also provide individual performance highlights that contributed to the Committee’s pay decisions for each NEO.

 

  AKHIL JOHRI  

 

Executive Vice President & Chief Financial Officer

 

AGE 56 | UTC EXPERIENCE 29 YEARS

 

         

TOTAL DIRECT COMPENSATION:

$5.96M

 

 

Base Salary. During 2017, Mr. Johri received a merit increase along with a market adjustment to his base salary, resulting in an aggregate increase from $825,000 to $860,000. This increase reflected the Committee’s favorable assessment of his performance, as well as its efforts to better align his base salary with the CPG and Fortune 100 market medians for CFOs. Following these increases, Mr. Johri’s base salary is now closely aligned with the market median.

 

Annual Bonus. For Mr. Johri’s 2017 annual bonus, the Committee considered the UTC adjusted financial performance factor of 122% (as previously discussed on page 39), his effective leadership of UTC’s Finance organization and the individual performance considerations noted here, and awarded Mr. Johri a $1.1 million annual bonus. This amount was slightly above the UTC financial performance factor.

 

LTI. In consideration of Mr. Johri’s strong 2017 performance, the Committee granted him a 2018 LTI award valued at $4.0 million, an amount that slightly exceeds the CPG and Fortune 100 market medians for his role.

INDIVIDUAL PERFORMANCE HIGHLIGHTS

 

Key role in UTC reaching an agreement to acquire Rockwell Collins for $30 billion (including $7 billion in assumed net debt).
Effective management of the Finance function evidenced by UTC’s strong cash flow and earnings performance.
Leadership in driving UTC’s disciplined capital allocation strategy, including:
  Full funding of UTC’s U.S. qualified pension plans (as of December 31, 2017) through a $1.9 billion contribution that will free up future cash flows, while reducing UTC’s exposure to future pension obligations and pension-related earnings volatility.
  Return of $3.5 billion to shareowners in 2017 through dividends and share repurchases.
  $3.9 billion in company- and customer-funded investments in research and development.
Ranked among the best CFOs in the Aerospace and Defense Electronics sector by Institutional Investor magazine.


 

46   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

  DAVID L. GITLIN  

 

President, UTC Aerospace Systems (“UTAS”)

 

AGE 48 | UTC EXPERIENCE 20 YEARS

 

         

TOTAL DIRECT COMPENSATION:

$10.01M

 

 

Base Salary. Mr. Gitlin received a base salary increase from $750,000 to $800,000, effective April 1, 2017, reflecting the Committee’s favorable assessment of his performance. Subsequently, the Committee adjusted Mr. Gitlin’s salary to $900,000, effective October 1, 2017, in connection with his role in the Company’s agreement to acquire Rockwell Collins and related pre-closing integration efforts. Mr. Gitlin’s base salary is now moderately above the CPG median.

 

Annual Bonus. The unadjusted UTC financial performance factor (129%, as discussed on page 39) and the factor for UTAS (104%) resulted in a blended financial performance factor of 114% of target. Based on these results, along with the individual performance considerations noted here, the Committee awarded Mr. Gitlin an annual bonus of $1.1 million, an amount slightly above UTAS’ blended financial performance factor.

 

LTI. In consideration of Mr. Gitlin’s 2017 performance, the Committee granted him a 2018 long-term incentive award valued at $4.0 million, an amount above the CPG median.

 

Retention RSU Award. In late 2017, the Committee also granted Mr. Gitlin a special $4.0 million retention RSU reflecting increasing leadership demands and integration challenges in connection with the announced acquisition of Rockwell Collins.

INDIVIDUAL PERFORMANCE HIGHLIGHTS

 

Solid operational execution, while meeting or exceeding all key financial targets.
Leadership in driving substantial UTAS accomplishments, including:
  Selection to provide wheels and brakes on more than 375 aircraft for five leading airlines, representing $180 million in new business.
  Support of NASA’s future human mission to Mars by providing active thermal control, power management and distribution systems for the first uncrewed Orion mission.
  Extensive systems and equipment to be supplied for China’s new C919 large commercial jetliner, which achieved its first flight in 2017.
  Honored by Aviation Week magazine for groundbreaking achievements in improving aviation safety in severe icing conditions.
  Development of the first chromate-free REACH-compliant landing gear corrosion protection coating for steel parts on commercial airplanes.


 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   47
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

  ROBERT J. MCDONOUGH  

 

President, UTC Climate, Controls & Security (“CCS”)

 

AGE 58 | UTC EXPERIENCE 10 YEARS

 

         

TOTAL DIRECT COMPENSATION:

$5.80M

 

 

 

Base Salary. Mr. McDonough received a base salary increase from $825,000 to $900,000 in 2017. This increase reflects the Committee’s favorable assessment of his performance, as well as the length of his tenure as President of CCS. Mr. McDonough’s base salary is now slightly above the CPG median.

 

Annual Bonus. The unadjusted UTC financial performance factor (129%, as discussed on page 39) and the factor for CCS (85%) resulted in a blended financial performance factor of 103% of target. However, the Committee used its discretion and reduced the blended financial performance factor for CCS to 98% to account for a product recall that occurred in 2017.

 

Based on these results, along with the individual performance considerations noted here, the Committee awarded Mr. McDonough an annual bonus of $900,000, an amount that closely aligns with CCS’ blended financial performance factor.

 

LTI. In consideration of Mr. McDonough’s 2017 performance, the Committee granted him a 2018 LTI award valued at $4.0 million, an amount above the CPG median.

INDIVIDUAL PERFORMANCE HIGHLIGHTS

 

Leadership in driving substantial CCS accomplishments, including:
  Achievement of strong 2017 sales growth of 6%, including organic growth of 4%.
  Attainment of industry-leading profit margins, notwithstanding significant investments in research and development and capital expenditures to drive product revitalization efforts and enhanced digital solutions.
  Launch of a suite of digital solutions that improves engagement and remote management of commercial HVAC systems, including the Carrier SMART Service that gives customers visibility into system performance through equipment dashboards, mobile applications and an online service and maintenance community.
  Advanced building automation, safety and cooling solutions provided to the Atlanta Braves’ SunTrust Park, as well as the mixed-use Battery Atlanta development project, located adjacent to the stadium.
  2,400 Transicold PrimeLINE refrigeration units to be provided to the shipping company Seatrade — 2,000 of which are equipped with Transicold’s EDGE technology, which improves energy efficiency by 20% compared to the standard unit.


 

48   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  COMPENSATION DISCUSSION AND ANALYSIS  

 

  ROBERT F. LEDUC  

 

President, Pratt & Whitney

 

AGE 61 | UTC EXPERIENCE 39 YEARS

 

         

TOTAL DIRECT COMPENSATION:

$5.80M

 

 

Base Salary. Mr. Leduc received a base salary increase from $750,000 to $800,000 in 2017. This increase reflected the Committee’s favorable assessment of his performance and its efforts to better align his base salary with the CPG market median. Mr. Leduc’s base salary is now closely aligned with the CPG median.

 

Annual Bonus. The unadjusted UTC financial performance factor (129%, as discussed on page 39) and the factor for Pratt & Whitney (139%) resulted in a blended financial performance factor of 135% of target. However, the Committee used its discretion and reduced the blended financial performance factor for Pratt & Whitney to 112% to account for an unfavorable customer contract adjustment.

 

Based on these results, along with the individual performance considerations noted here, the Committee awarded Mr. Leduc an annual bonus of $1.0 million, an amount slightly above Pratt & Whitney’s blended financial performance factor.

 

LTI. Reflecting its favorable assessment of Mr. Leduc’s 2017 performance, the Committee granted him a 2018 LTI award valued at $4.0 million, an amount above the CPG median.

INDIVIDUAL PERFORMANCE HIGHLIGHTS

 

Leadership in driving substantial Pratt & Whitney accomplishments, including:
  Achievement of strong 2017 sales and organic growth of 9%.
  Shipments of 374 GTF family engines, which were within our 2017 target range of 350 to 400 and nearly triple 2016 shipments.
  Announcement of the Delta Air Lines agreement to acquire 100 GTF-powered Airbus A321neo aircraft, with options to acquire an additional 100.
  Launch of EngineWise, a comprehensive program designed to improve the predictability and reliability of customer fleets by using state-of-the-art data analytics and real-time intelligence to predict and prevent disruptions.
  Certification of Pratt & Whitney’s PurePower GTF engine for the Mitsubishi Regional Jet and Embraer E2 aircraft.
  Achievement of outstanding employee engagement, while meeting extreme and challenging operational demands.


 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   49
 

   COMPENSATION DISCUSSION AND ANALYSIS   

 

Other Compensation Elements

 

Retirement and Deferred Compensation Benefits

Retirement and deferred compensation plans help UTC attract and retain talented executives. Over the years, the Committee has from time to time updated these programs to maintain a competitive position within an evolving market. We believe the overall design of our retirement and deferred compensation programs is currently consistent with compensation practices in the marketplace and provides participating executives with benefits that approximate the CPG median.

 

Below is a brief description of the various retirement and deferred compensation arrangements we offer. See the Pension Benefits section on pages 59-60 and the Nonqualified Deferred Compensation section on pages 61-62 for more details.

 

Plan   Description
UTC Employee Retirement Plan   Only employees hired prior to January 1, 2010, are eligible to participate in this tax-qualified pension plan. Effective December 31, 2014, participants who had been covered by the original final average earnings (“FAE”) formula of this plan transitioned to a more modest cash balance formula, which was already in effect for newer participants.
UTC Pension Preservation Plan   An unfunded, nonqualified retirement plan utilizing the same benefit formula, compensation recognition, retirement eligibility and vesting provisions as the tax-qualified UTC Employee Retirement Plan. For employees hired prior to January 1, 2010, it provides pension benefits not provided under the tax-qualified pension plan because of Internal Revenue Code limits.
UTC Employee Savings Plan   A tax-qualified plan where employees receive a matching contribution in the form of UTC stock units with a value equal to 60% of the first 6% of pay (consisting of base salary plus annual bonus) contributed by the employee. Salaried employees hired on or after January 1, 2010, who are not eligible to participate in the UTC Employee Retirement Plan receive an additional age-based Company contribution (ranging from 3% to 5.5% of earnings) to their UTC Employee Savings Plan account.
UTC Savings Restoration Plan   An unfunded, nonqualified plan that matches the executive’s contributions with Company contributions in UTC stock units at the same rate as the UTC Employee Savings Plan, to the extent such contributions exceed Internal Revenue Code limits.
UTC Company Automatic Contribution Excess Plan   An unfunded, nonqualified plan for which salaried employees hired on or after January 1, 2010, may receive an additional age-based Company automatic contribution (ranging from 3% to 5.5% of earnings) for amounts above the Internal Revenue Code limits applicable to the qualified UTC Employee Savings Plan. Participants receiving benefits under this plan are ineligible to accrue a benefit under the UTC Pension Preservation Plan described above.
UTC Deferred Compensation Plan   An unfunded, nonqualified, deferred compensation plan that offers executives the opportunity to defer up to 50% of base salary and up to 70% of annual bonus.
UTC PSU Deferral Plan   An unfunded, nonqualified, deferred compensation plan that allows executives to defer between 10% and 100% of their vested PSU awards. Upon vesting, the deferred portion of each PSU award is converted into deferred stock units that accrue dividend equivalents.

 

50   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement

 

  COMPENSATION DISCUSSION AND ANALYSIS  

 

Perquisites and Other Benefits

We provide the following benefits to our senior executives which the Committee believes are consistent with market practice and contribute to recruitment and retention.

 

Perquisite/Benefits*   Description
ELG Life Insurance   ELG members appointed prior to January 31, 2015, may receive company-funded life insurance coverage up to three times their base salary at age 62 (projected or actual). This benefit is not available to Mr. Leduc, who was appointed to the ELG after January 31, 2015.
ELG Long-Term Disability   The ELG long-term disability program provides an annual benefit upon disability that is equal to 80% of base salary plus target annual bonus.
Healthcare   ELG members are eligible to participate in the same health benefit program we offer to our other employees.
Executive Physical   ELG members are eligible for a comprehensive annual executive physical.
Executive Leased Vehicle   UTC provides ELG members with an annual allowance toward the costs of a leased vehicle. The value of the allowance varies by ELG appointment date. Any costs above the annual allowance are paid directly by the executive.
Financial Planning   ELG members are eligible to receive an annual financial planning benefit.
Personal Aircraft Usage   Our CEO is allowed personal use of the Corporate aircraft for up to 50 hours per year. The Committee believes this optimizes the efficient use of Mr. Hayes’ time. Under this policy, Mr. Hayes may also fly commercially, subject to review by UTC security personnel. No other UTC employees are permitted to use the Corporate aircraft for personal reasons.
Security Arrangements   After a third-party security assessment, the Committee approved a security benefit for our CEO. Beginning in 2017, UTC covered expenses for the installation and monitoring of Mr. Hayes’ home security system.

 

* See footnote (5) to the Summary Compensation Table on page 55 for more details on these perquisites/benefits.

 

Severance and Change-in-Control Arrangements

ELG members participate in severance and change-in-control arrangements similar to programs in effect at the majority of companies in our CPG. The Committee believes such arrangements are part of a competitive executive compensation program. Our severance program incorporates post-employment restrictive covenants designed to protect UTC’s interests, including non-compete, non-solicitation and non-disclosure obligations.

 

Severance and change-in-control benefits are contingent upon certain future events which may never occur. The Committee, therefore, does not consider these contingent benefits when setting other compensation elements or measuring total direct compensation.

 

For specific details on our severance and change-in-control arrangements and how these programs have evolved over time, see the Potential Payments on Termination or Change-in-Control section on pages 62-65.

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   51
 

   COMPENSATION DISCUSSION AND ANALYSIS   

 

Other Executive Compensation Policies and Practices

 

Succession Planning

On an annual basis, the Chairman & CEO and the Executive Vice President & Chief Human Resources Officer provide the Board with information concerning the succession planning for key senior leadership roles, including the CEO. Succession plans include a readiness assessment, biographical information and future career development plans. The Board’s views are incorporated into succession plans which are updated annually based on this feedback.

 

Employment Agreements

The Committee does not believe fixed-term executive employment contracts that guarantee minimum levels of compensation over multiple years enhance shareowner value. Accordingly, our U.S.-based executives do not have employment contracts. However, non-U.S.-based executives may have contracts consistent with local regulations and practices.

 

Post-Employment Restrictive Covenants

ELG members may not engage in activities after termination or retirement that are detrimental to UTC, such as disclosing proprietary information, soliciting UTC employees or engaging in competitive activities. Violations can result in a clawback of annual and long-term incentive awards.

 

Tax Deductibility of Incentive Compensation

To the extent consistent with other compensation objectives, the Committee has sought to minimize UTC’s compensation-related tax burden. For 2017, Internal Revenue Code section 162(m) limited UTC’s deduction to $1 million for annual compensation paid to the CEO and each of the three other most highly compensated NEOs (excluding the CFO), unless the compensation qualifies as “performance-based compensation” as defined in section 162(m).

 

Clawback Policy

UTC has a comprehensive policy on recoupment (“clawback”) of executive compensation, which applies to both our annual and long-term incentive compensation programs. In the event of a financial restatement or recalculation of a financial metric applicable to an award, the Company has the right to recover annual bonus payments and gains realized from vested long-term incentive awards from any executive (including NEOs) involved in activities that caused the restatement or recalculation. Clawbacks of bonuses, long-term incentive awards and compensation realized from prior awards also may be triggered by violations of our Code of Ethics, failure to meet employee health and safety standards, violations of post-employment restrictive covenants, or the exposure of UTC to excessive risk, as determined under the Enterprise Risk Management (“ERM”) program. In addition, the Company has the right to recover compensation when an executive’s negligence (including negligent supervision of a subordinate) causes significant harm to UTC. If required or otherwise appropriate, the Company may publicly disclose the circumstances surrounding the Committee’s decision to seek recoupment.

 

Anti-Hedging and Anti-Pledging Policy

UTC does not allow directors or executives to enter into short sales of UTC Common Stock or similar transactions where potential gains are linked to a decline in the price of our shares. Unvested equity awards may not be assigned, traded, transferred or otherwise disposed of for economic benefit. Additionally, our directors and executives are not permitted to pledge UTC shares as collateral for loans or any other purpose.

 

52   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
     

 

    REPORT OF THE    

Compensation Committee

 

The Compensation Committee establishes and oversees the design and function of UTC’s executive compensation program. We have reviewed and discussed the foregoing Compensation Discussion and Analysis with the Management of the Company, and have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in UTC’s Proxy Statement for the 2018 Annual Meeting.

 

COMPENSATION COMMITTEE
   
Jean-Pierre Garnier, Chair Edward A. Kangas Harold W. McGraw III
John V. Faraci Ellen J. Kullman Brian C. Rogers

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   53
 
     

 

    COMPENSATION    

Tables

 

SUMMARY COMPENSATION TABLE  x3_c90207x62x1 

 

Year  Salary
($)
  Bonus
($)(1)
  Stock Awards
($)(2)
  Option
Awards
($)(3)
  Change
in Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)(4)
  All Other
Compensation
($)(5)
  Total
($)
  Total
Without
Change in
Pension Value
($)
 
                      
GREGORY J. HAYES • Chairman & Chief Executive Officer                     
2017   $1,500,000    $3,300,000    $7,877,818    $2,589,650    $1,277,981    $482,044    $17,027,493    $15,759,799 
2016   $1,450,000    $3,000,000    $4,960,217    $3,706,560    $2,392,716    $321,842    $15,831,335    $13,448,390 
2015   $1,300,000    $850,000    $4,752,443    $3,280,210    $230,673    $354,502    $10,767,828    $10,547,063 
                       
AKHIL JOHRI • Executive Vice President & Chief Financial Officer                      
2017   $851,250    $1,100,000    $2,674,030    $883,225    $198,047    $356,512    $6,063,064    $5,865,017 
2016   $766,667    $1,100,000    $1,609,731    $1,207,440    $151,840    $259,356    $5,095,034    $4,943,194 
2015   $700,000    $1,040,000    $6,770,654    $3,470,482    $1,174    $386,405    $12,368,715    $12,367,541 
                            
DAVID L. GITLIN • President, UTC Aerospace Systems                           
2017   $812,500    $1,100,000    $6,855,052    $943,250    $385,996    $181,970    $10,278,768    $9,892,772 
                     
ROBERT J. MCDONOUGH • President, UTC Climate, Controls & Security                    
2017   $881,250    $900,000    $2,851,552    $943,250    $222,507    $137,048    $5,935,607    $5,713,100 
2016   $806,250    $1,100,000    $2,470,750    $1,853,280    $149,742    $136,899    $6,516,921    $6,367,179 
                            
ROBERT F. LEDUC • President, Pratt & Whitney                           
2017   $787,500    $1,000,000    $2,851,552    $943,250    $353,740    $167,289    $6,103,331    $5,749,591 
2016   $665,057    $600,000    $2,829,436    $1,107,040    $350,287    $112,104    $5,663,924    $5,313,637 

 

(1) Bonus. Cash bonuses provided under the UTC Annual Executive Incentive Compensation Plan. Payments are primarily based on measured performance against pre-established goals. However, the Committee retains discretion to adjust annual bonus amounts based on its assessment of overall performance. Consequently, we report annual bonuses in the Bonus column rather than in a Non-Equity Incentive Plan Compensation column.
(2) Stock Awards. Grant date fair value of PSUs and RSUs issued under the LTIP, calculated in accordance with the Compensation—Stock Compensation Topic of the FASB ASC, but excluding the effect of estimated forfeitures. The assumptions made in calculating the fair value of these awards are set forth in Note 12, Employee Benefit Plans, to the Consolidated Financial Statements in Exhibit 13 to UTC’s 2017 Annual Report on Form 10-K (“2017 Form 10-K”). PSU awards are discussed in the Compensation Discussion and Analysis and in footnote (2) to the Grants of Plan-Based Awards table on page 56 of this Proxy Statement. The grant date fair values shown for PSU awards granted in 2017 to our NEOs assume target-level performance. If the highest level of performance is achieved, the grant date fair values would be: Mr. Hayes, $9,248,621; Mr. Johri, $3,150,025; Mr. Gitlin, $3,351,480; Mr. McDonough, $3,351,480; and Mr. Leduc, $3,351,480. Amounts shown for Mr. Gitlin include a special retention RSU award valued at $4,003,500.
(3) Option Awards. Grant date fair value of SARs granted under the LTIP, calculated in accordance with the Compensation—Stock Compensation Topic of the FASB ASC, but excluding the effect of estimated forfeitures. The assumptions made in the valuation of these awards are set forth in Note 12, Employee Benefit Plans, to the Consolidated Financial Statements in Exhibit 13 to UTC’s 2017 Form 10-K. All awards shown are SARs.
(4) Change in Pension Value and Nonqualified Deferred Compensation Earnings. The increase during 2017 in the actuarial present value of each executive’s accrued benefit under UTC’s defined benefit plans. Actuarial value computations are based on the assumptions established in accordance with the Compensation—Retirement Benefits Topic of the FASB ASC and discussed in Note 12, Employee Benefit Plans, to the Consolidated Financial Statements in Exhibit 13 to UTC’s 2017 Form 10-K. Above-market rates of return are not provided under UTC’s deferred compensation plans. However, an above-market interest rate is paid under the frozen Sundstrand Corporation Deferred Compensation Plan, which was assumed by UTC upon the acquisition of Sundstrand in 1999. Mr. Hayes accrued $10,287 in above-market earnings under this plan in 2017.

 

54   United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement
 
  COMPENSATION TABLES  

 

(5) All Other Compensation. The 2017 amounts in this column consist of the following items:

 

Name   Personal
Use of
Corporate
Aircraft(a)
  Leased
Vehicle(b)
  Insurance
Premiums(c)
  401(k) Plan
Company
Contributions(d)
  Company
Contributions
to Non-
Qualified
Retirement
Plans(e)
  Relocation
Benefit
  Financial
Planning(f)
  Security
Benefit(g)
  Health
Benefit(h)
  Misc.   Total  
G. Hayes     $79,350     $33,066     $143,741     $9,720     $152,280     $0     $0     $43,197     $19,717     $973     $482,044  
A. Johri     $0     $25,421     $129,963     $24,570     $152,994     $0     $4,900     $0     $17,926     $738     $356,512  
D. Gitlin     $0     $30,149     $63,604     $9,720     $51,930     $0     $16,000     $0     $9,829     $738     $181,970  
R. McDonough     $0     $28,671     $74,879     $0     $0     $15,750     $0     $0     $17,676     $72     $137,048  
R. Leduc     $0     $24,342     $0     $24,570     $101,692     $0     $0     $0     $15,946     $739     $167,289  

 

(a) Incremental variable operating costs incurred for personal travel, which includes fuel (calculated on the basis of aircraft-specific average consumption rates and fleet average fuel costs), fleet average landing and handling fees, additional crew lodging and meal allowances, and catering and hourly maintenance contract charges, when applicable. Because fleet-wide aircraft utilization is primarily for business purposes (approximately 99% in 2017), capital and other fixed expenditures are not treated as variable operating costs relative to personal use.
(b) Annual costs associated with a leased vehicle paid by UTC on behalf of the executive.
(c) Premium paid on behalf of the executive under the ELG life insurance program. Under this program, UTC pays the premiums on a cash value life insurance contract owned by the executive. Life insurance benefits equal up to three times the executive’s actual or projected base salary at age 62. Once vested (age 55 or older with three years of service as an ELG member), UTC funds the policy to maintain coverage following retirement. This benefit was eliminated for ELG members appointed after January 31, 2015, including Mr. Leduc.
(d) Dollar value of matching contributions made under the UTC Employee Savings Plan. UTC’s pension plans were closed to participants effective January 1, 2010. Both Messrs. Johri and Leduc were rehired after this date and, therefore, no longer accrue benefits under the Company’s pension plan. Instead, they receive an additional age-based contribution in the Company’s Employee Savings Plan.
(e) Dollar value of Company contributions to the UTC Savings Restoration Plan (“SRP”) and the Company Automatic Contribution Excess Plan (“CACEP”). Under the SRP, participants are credited with a benefit equal to the UTC matching contribution that the executive did not receive under the UTC Employee Savings Plan due to Internal Revenue Code (“IRC”) limits. For executives hired on or after January 1, 2010, including Messrs. Johri and Leduc, the CACEP provides an additional age-based Company automatic contribution for compensation earned over IRC limits. Details on our nonqualified deferred compensation plans, which include the SRP and CACEP, are provided on page 61 of this Proxy Statement.
(f) Costs associated with a financial planning benefit available to ELG members.
(g) Costs associated with the installation and monitoring of a home security system in Mr. Hayes’ personal residence, following a comprehensive, third-party security evaluation.
(h) Costs incurred by the Company associated with annual executive physicals and the Company’s health and welfare benefit programs.

 

United Technologies Notice of 2018 Annual Meeting of Shareowners and Proxy Statement   55
 
  COMPENSATION TABLES  

 

GRANTS OF PLAN-BASED AWARDS  x3_c90207x64x1

 

    Estimated Future Payouts under
Equity Incentive Plan Awards(2)
  All Other
Stock Awards:
  All Other
Option Awards:
Number of
  Exercise or   Grant Date Fair  
Grant Date(1)   Threshold (#)