DEF 14A 1 noc-2019xdef14a.htm DEF 14A Document






UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
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Preliminary Proxy Statement
  
 
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Definitive Proxy Statement
  
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Definitive Additional Materials
  
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Soliciting Material Pursuant to §240.14a-12
  
Northrop Grumman Corporation
 
(Name of Registrant as Specified In Its Charter)
 
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March 29, 2019
On behalf of the Board of Directors and management team, we cordially invite you to attend Northrop Grumman Corporation's 2019 Annual Meeting of Shareholders. This year's meeting will be held on Wednesday, May 15, 2019 at our principal executive office located at 2980 Fairview Park Drive, Falls Church, Virginia 22042 beginning at 8:00 a.m., Eastern Daylight Time.
We look forward to meeting those of you who are able to attend the meeting. For those who are unable to attend, live coverage of the meeting will be available on the Northrop Grumman website at www.northropgrumman.com.
At this meeting, shareholders will vote on matters set forth in the accompanying Notice of 2019 Annual Meeting of Shareholders and Proxy Statement. We will also provide a report on our Company and will entertain questions of general interest to the shareholders.
2018 was another year of strong performance for our Company. Our acquisition of Orbital ATK in June added a new, fourth business sector to our Company, Innovation Systems, which was immediately accretive to earnings and enhanced our position in the critical space and missile defense domains. Sales rose 16%, operating income increased 17%, and our businesses generated a 19% increase in segment operating profit*. We also generated higher net earnings and earnings per share. These results reflect the addition of Innovation Systems and strong performance from our three legacy Northrop Grumman sectors.
Our capital deployment strategy continues to create shareholder value. In addition to acquiring Orbital ATK, we maintained robust capital expenditures to drive innovation and affordability for our customers. We reduced debt by $2.3 billion, made voluntary contributions to our pension funds, and distributed $2.1 billion to our shareholders through share repurchases and dividends. We increased our dividend twice, totaling approximately 20%. We repurchased $1.3 billion in shares, and early in January, we completed the $1 billion accelerated share repurchase we commenced in 2018, retiring 3.84 million shares at an average price of approximately $260 per share.
In 2018, we also announced an important leadership transition. Kathy Warden, who joined Northrop Grumman in 2008, and has assumed positions of increasing responsibility in critical national security domains since then, was elected to the Board of Directors in July and assumed the CEO role this January. Ms. Warden's deep knowledge and experience, along with her demonstrated leadership across multiple Northrop Grumman businesses, make her particularly well qualified to support the achievement of our Company's many value creation opportunities. Mr. Bush continues as Chair of the Board until July 31, 2019.
We also continue to strengthen our corporate citizenship and sustainability efforts with leading environmental, social and governance practices. Female representation on our Board has increased to more than 30%. We received a Catalyst Award for the significant progress the Company made to increase the number of women and women of color in leadership positions over a sustained period from 2010-2016. Over this period, women on our senior executive team increased from 8% in 2010 to 46% in 2016, and at the vice president level from 15% to 29% over the same time period. DiversityInc named us one of their Top 50 Companies for Diversity for the ninth consecutive year. For the seventh consecutive year, Northrop Grumman earned a leadership score in CDP's 2018 climate change program. We were again included in the Dow Jones Sustainability Index for North America and we also achieved the highest ESG scores from the proxy advisor, ISS.
In 2018, as in prior years, we actively engaged with our shareholders on a variety of matters, including our strategy for long-term value creation, and ensuring our governance, compensation and sustainability practices are well designed to support long-term profitability growth and value creation.
Your vote is important. Your proxy or voting instruction card includes specific information regarding the several ways to vote your shares. We encourage you to vote as soon as possible, even if you plan to attend the meeting. You may vote over the internet, by telephone or mobile device, by mailing a proxy or voting instruction card or in person at the Annual Meeting.
Thank you for your support and continued interest in Northrop Grumman Corporation.
Wes Bush
Donald E. Felsinger
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Chairman
Lead Independent Director
    
 * This metric is a non-GAAP financial measure. For more information, see "Appendix A - Use of Non-GAAP Financial Measures."    

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I



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Notice of 2019 Annual
Meeting of Shareholders

Wednesday, May 15, 2019
8:00 a.m., Eastern Daylight Time
Northrop Grumman Corporation, Principal Executive Office
2980 Fairview Park Drive, Falls Church, Virginia 22042

The 2019 Annual Meeting of Shareholders (Annual Meeting) of Northrop Grumman Corporation (Company) will be held on Wednesday, May 15, 2019 at 8:00 a.m., Eastern Daylight Time, at our principal executive office located at 2980 Fairview Park Drive, Falls Church, Virginia 22042.
Shareholders of record at the close of business on March 19, 2019 are entitled to vote at the Annual Meeting. The following items are on the agenda:
1.
The election of the 13 nominees named in the accompanying Proxy Statement;
2.
A proposal to approve, on an advisory basis, the compensation of our named executive officers;
3.
A proposal to ratify the appointment of Deloitte & Touche LLP as our independent auditor for the year ending December 31, 2019;
4.
A shareholder proposal to provide for a report on management systems and processes for implementing the Company's human rights policy;
5.
A shareholder proposal to provide for an independent chair; and
6.
Any other business as may properly come before the Annual Meeting or any adjournment or postponement thereof.
All shareholders are invited to attend the Annual Meeting. To be admitted you will need proof of stock ownership and a form of photo identification. If your broker holds your shares in "street name," you will also need proof of beneficial ownership of Northrop Grumman common stock.
We encourage all shareholders to vote on the matters described in the accompanying Proxy Statement. Please see the section entitled "Questions and Answers About the Annual Meeting" on page 78 for information about voting over the internet, by telephone or mobile device, by mailing a proxy or voting instruction card or by attending in person at the Annual Meeting.
By order of the Board of Directors,
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Jennifer C. McGarey
Corporate Vice President and Secretary

March 29, 2019 
Important Notice Regarding the Availability of Proxy Materials for the Shareholders Meeting to be held on May 15, 2019: The Proxy Statement for the 2019 Annual Meeting of Shareholders and the Annual Report for the year ended December 31, 2018 are available at: www.edocumentview.com/noc.

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I


TABLE OF CONTENTS


PROXY STATEMENT SUMMARY
 
 
2019 Nominees for Director
 
 
Overview
Director Election Process
Board Composition and Director Nominations
Director Orientation and Continuing Education
Board Membership and External Relationships
Effect of Failure to Receive the Required Vote or Obtain and Retain Security Clearance
Board and Committee Self-Evaluation
Succession Planning
Corporate Responsibility
 
 
Stock Ownership Requirements and Anti-Hedging and Pledging Policy
2018 Director Compensation
 
 
Related Person Transactions
Indemnification Agreements
 
 
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
 
Stock Ownership of Certain Beneficial Owners
Stock Ownership of Officers and Directors
 
 
 
 
PROPOSAL TWO: ADVISORY VOTE ON COMPENSATION OF NAMED EXECUTIVE OFFICERS
 
 
 
 

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I i


TABLE OF CONTENTS


Executive Summary
Key Principles
Key Components of Our Programs
 
 
COMPENSATION COMMITTEE REPORT
 
 
COMPENSATION TABLES
Summary Compensation Table
Grants of Plan-Based Awards Table
Outstanding Equity Awards Table
Stock Vested Table
Pension Benefits
Nonqualified Deferred Compensation Table
 
 
CEO PAY RATIO
 
 
TERMINATION PAYMENTS AND BENEFITS
Termination Payment Table
 
 
PROPOSAL THREE: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR
Audit Fees and All Other Fees
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
 
 
 
 
PROPOSAL FOUR: SHAREHOLDER PROPOSAL
 
 
PROPOSAL FIVE: SHAREHOLDER PROPOSAL
 
 
 
 
Shareholder Proposals for the 2020 Annual Meeting
Shareholder Nominations for Director Election at the 2020 Annual Meeting
Incorporation by Reference
Annual Report
 
 
APPENDIX A - USE OF NON-GAAP FINANCIAL MEASURES




ii I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


PROXY STATEMENT SUMMARY



This summary highlights information contained elsewhere in this Proxy Statement, reflecting business, compensation and corporate governance highlights. For additional information about these topics, please refer to the discussions contained in this Proxy Statement and in our Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC) on January 31, 2019. This Proxy Statement contains certain non-GAAP (accounting principles generally accepted in the United States of America) financial measures, which are identified with asterisks. For more information, including definitions, reconciliations to the most directly comparable GAAP measure and why we believe these measures may be useful to investors, see "Appendix A - Use of Non-GAAP Financial Measures." We intend to mail a Notice of Internet Availability of Proxy Materials to shareholders of record and to make this Proxy Statement and accompanying materials available on the internet on or about March 29, 2019.
2018 Performance Highlights (page 38)
Our focus on performance, portfolio and capital deployment continues to strengthen our foundation for long-term profitable growth and create value for our shareholders, customers and employees.
2018 was another year of strong performance for our Company. We strengthened our alignment with critical national security missions with the acquisition of Orbital ATK in June. This added a new, fourth business sector, Innovation Systems. Strong performance from our three legacy Northrop Grumman sectors, along with the contribution of our new sector, drove a 16% sales increase, a 17% increase in operating income, and a 19% increase in segment operating income*. 2018 diluted earnings per share increased to $18.49. We also announced the adoption of the mark-to-market (MTM) method of accounting for our pension and other postretirement benefit plans. Beginning with our fourth quarter 2018 financial results, we are presenting MTM-adjusted earnings* and MTM-adjusted diluted earnings per share* as a supplemental financial measure for measuring the Company's underlying financial performance. MTM-adjusted earnings per share* increased more than 50% to $21.33.
Our operations continued to generate strong cash flow. Cash provided by operations increased $1.2 billion to more than $3.8 billion, and free cash flow* increased by approximately $900 million to $2.6 billion. Our strong cash generation enabled us to continue deploying cash for the benefit of our customers, shareholders and employees. In 2018, our capital expenditures totaled $1.2 billion and we invested $764 million in R&D. Our capital expenditures continue to be elevated as we invest to strengthen the foundation for long-term profitable growth and drive affordability for our customers.
We continued to return cash to shareholders. In October 2018, we commenced a $1 billion accelerated share repurchase (ASR), which was completed in January 2019. This transaction retired 3.84 million shares of our stock at an average price of approximately $260 per share. 2018 share repurchases totaled $1.3 billion. We also announced two dividend increases, which in total increased our quarterly dividend by 20% to $1.20 per share.
In July 2018, after robust and extended succession planning, the Board of Directors elected Kathy Warden to our Board and announced that she would succeed Wesley Bush as CEO, beginning on January 1, 2019. After serving nine years in the CEO role, Mr. Bush remains Chair of the Board until July 31, 2019.
 
40% 3-year Total Shareholder Return (2016-2018) 
 
16% Sales increase to $30.1 billion

Total backlog of $53.5 billion
 
$821 million in dividends paid  

20% total increase in quarterly dividend per share
 
$1.3 billion in share repurchases

$1 billion accelerated share 
repurchase commenced in Oct. 2018
 
Capital spending 
of $1.2 billion

Internal R&D spending of
$764 million
 
 
 
 
 
 
 
 
 


NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 1


PROXY STATEMENT SUMMARY



2018 Executive Compensation Highlights (page 37)
We are committed to performance-based executive compensation programs that align with shareholders' interests and our strategy of investing for and delivering long-term profitable growth.
Due to strong financial performance in 2018, our 2018 Annual Incentive Plan (AIP) payout increased to 160%, from 131% in 2017. Our Long-Term Incentive Plan (LTIP) payout is 115% compared to 150% in 2017 for named executive officers (NEOs). We ranked in the 45th percentile for three-year TSR performance relative to the 2016 Performance Peer Group identified on page 42, ranked in the 64th percentile for three-year TSR performance relative to the S&P Industrials and exceeded our target for Cumulative Free Cash Flow* (Cumulative FCF*). Following are some governance principles of our 2018 executive compensation programs:
70% of Annual LTIP Equity Grant Performance-Based
 
Stock Ownership Guidelines for All Officers:
CEO 7x
Other NEOs 3x
 
3-Year Mandatory
Holding Period for 50% of Vested Shares
 
Recoupment Policy 
on Incentive Payouts
 
No Individual Change in Control Agreements

Board Nominees (pages 6-12)
Name
Age (1)
Director
since
Professional Background
      Committee Memberships
Other Public
Company Boards
Audit
Comp
Gov
Policy
Wesley G. Bush
57
09/2009
Chairman, Northrop Grumman Corporation
1
Marianne C. Brown
60
03/2015
Co-Chief Operating Officer, Global Financial Solutions, Fidelity National Information Services, Inc.
 
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Donald E. Felsinger
71
02/2007
Lead Independent Director, Northrop Grumman Corporation; Former Chairman and CEO, Sempra Energy
 
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2
Ann M. Fudge
67
03/2016
Former Chairman and Chief Executive Officer, Young & Rubicam Brands
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1
Bruce S. Gordon
73
10/2008
Former President, Retail Markets Group, Verizon Communications Inc.; Former President and CEO, NAACP
 
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William H. Hernandez
70
09/2013
Former Senior Vice President and CFO, PPG Industries, Inc.
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2
Madeleine A. Kleiner
67
10/2008
Former Executive Vice President and General Counsel, Hilton Hotels Corporation
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1
Karl J. Krapek
70
09/2008
Former President and COO, United Technologies Corporation
 
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2
Gary Roughead
67
02/2012
Retired Admiral, United States Navy and Former Chief of Naval Operations
 
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Thomas M. Schoewe
66
08/2011
Former Executive Vice President and CFO, Wal-Mart Stores, Inc.
 
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2
James S. Turley
63
02/2015
Former Chairman and Chief Executive Officer, Ernst & Young
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3
Kathy J. Warden
47
07/2018
Chief Executive Officer and President, Northrop Grumman Corporation
Mark A. Welsh III
65
12/2016
Dean of the Bush School of Government and Public Service, Texas A&M University; Retired General, United States Air Force and Former Chief of Staff, United States Air Force
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(1)
Age as of March 29, 2019. image52.gif = Chair image50.gif = Member

2 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


PROXY STATEMENT SUMMARY



Board Nominee Highlights
The charts below reflect the tenure, independence and broad experience of our board nominees.
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NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 3


PROXY STATEMENT SUMMARY



Governance Highlights (pages 14-24)
We are committed to high standards of corporate governance and have a robust corporate governance program intended to promote the long-term success of our Company. Some highlights of our corporate governance practices are listed below.
Board Structure and Governance
 
The Board is approximately 85% independent.
 
Each of the Audit, Compensation, Governance and Policy Committees is comprised entirely of independent directors.
 
Our policy limits the number of boards on which our directors serve (no more than three other public company boards without special approval) to avoid overboarding.
 
The independent directors regularly hold both executive sessions led by our Chairperson and independent sessions led by our Lead Independent Director.
 
Our Lead Independent Director, appointed annually by the independent directors, is empowered with a robust set of responsibilities and provides additional independent oversight of senior management and Board leadership.
 
All directors are elected annually based on a majority voting standard in uncontested elections, with a director resignation policy if a director fails to receive a majority of votes cast "for" his or her election.
 
The Board nominees reflect a balanced mix of directors with deep Company and industry knowledge, and fresh and diverse perspectives, with an average director tenure of 6.5 years.
 
The Board and each Committee annually conduct a thorough self-assessment process focused on Board or Committee performance, respectively. In addition, each director completes an individual director evaluation for each of the other directors and receives feedback on his or her own performance.
 
We have a director retirement policy for directors who reach the age of 75 and are committed to Board refreshment, with the addition of five new directors to the Board in the last five years.
 
Three of our directors - Marianne Brown, Ann Fudge and Madeleine Kleiner - have been honored by Women's Inc. as three of the most influential corporate directors of 2018.
 
One of our directors - William Hernandez - has been recognized by a local chapter of the NACD with a leadership in corporate governance award in 2018.
 
 
 
 
Shareholder Rights
 
The Board has adopted a robust proxy access bylaw provision, allowing eligible shareholders to include their own director nominees in the Company's proxy materials.
 
Shareholders holding at least 25% of our common stock have the right to call a special meeting.
 
Shareholders holding at least 25% of our common stock have the right to take action by written consent.
 
 
 
 
Corporate Responsibility and Sustainability
 
We have a strong ethics program with standards of business conduct that help guide and promote good governance, responsible business practices and the highest standards of integrity throughout the Company.
 
We have robust programs to fulfill our commitment to diversity and inclusion throughout the Company.
 
We publish an annual corporate responsibility report highlighting aspects of our social, environmental and governance performance and engage an independent external review panel to provide feedback and advice on our report.
 
We integrate environmental sustainability into our organizational culture, minimizing our environmental footprint and driving affordability. Our executive officers are accountable for achieving environmental sustainability goals, which are one of our six non-financial corporate performance metrics.
 
We disclose our political contributions policy and various trade association memberships on our website.
 
We have a robust recoupment policy which provides the Board of Directors with the ability to recoup the incentive compensation of elected officers under certain circumstances.
 
 
 
 
Stock Ownership
 
We have stock ownership guidelines of 7x base salary for the CEO and 3x base salary for other named executive officers, as well as stock holding requirements of three years from the vesting date.
 
We have stock ownership guidelines of 5x the annual cash retainer for our non-employee directors.
 
We prohibit hedging and pledging of our common stock by directors and executive officers.

4 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


PROXY STATEMENT SUMMARY



Shareholder Engagement
We regularly engage with our shareholders to understand their perspectives on our Company, including our strategies, performance, issues of governance and corporate responsibility, and executive compensation. This ongoing dialogue, in which both members of management and directors participate, has helped inform the Board's decision-making and ensure our interests remain well-aligned with those of our shareholders.
Since our 2018 annual meeting, we have offered to engage on governance-related topics with shareholders representing approximately 60% of our outstanding shares. We have met with shareholders representing more than 40% of our outstanding shares to learn their perspectives on the Company and governance-related topics. While a number of our shareholders did not request meetings, we believe it is a best practice to offer engagement to shareholders representing a majority of our shares outstanding. These efforts are in addition to normal course outreach conducted by our Investor Relations team and members of senior management with portfolio managers and analysts, which are primarily focused on strategy and Company performance. We also meet with shareholders at investor conferences held throughout the year.
The Company has a substantial record of adopting provisions or modifying practices with the benefit of, and to reflect, shareholder input. Examples include provisions regarding proxy access, the right of shareholders to call a special meeting and the right of shareholders to act by written consent, as well as the use of full value shares and performance-based long-term incentives for our executives.
Annual Shareholders' Meeting
Time:  May 15, 2019, 8:00 a.m., Eastern Daylight Time
Record Date:  You can vote if you were a shareholder of record at the close of business on March 19, 2019.
Place:  Northrop Grumman Corporation
             2980 Fairview Park Drive
             Falls Church, Virginia 22042

Admission:  You will need proof of stock ownership and a form of photo identification. All recording devices are prohibited in the meeting.
Voting Matters and Board Recommendations
 
Board Vote Recommendation
Page Reference

Proposal One: Election of Directors
FOR each Director Nominee
6

Proposal Two: Advisory Vote on Compensation of Named Executive Officers
FOR
34

Proposal Three: Ratification of Appointment of Independent Auditor
FOR
69

Proposal Four: Shareholder Proposal to Provide for a Report on Management Systems and Processes for Implementing the Company's Human Rights Policy
AGAINST
72

Proposal Five: Shareholder Proposal to Provide for an Independent Chair
AGAINST
75


NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 5


PROPOSAL ONE: ELECTION OF DIRECTORS



2019 Nominees for Director
Our Board has nominated 13 directors for election at the Annual Meeting. Each of the director nominees has consented to serve, and we do not know of any reason why any of them would be unable to serve, if elected. If a nominee becomes unavailable or unable to serve before the Annual Meeting (for example, due to serious illness), the Board may determine to leave the position vacant, reduce the number of authorized directors or designate a substitute nominee. If any nominee becomes unavailable for election to the Board, an event which is not anticipated, the proxyholders will have full discretion and authority to vote, or refrain from voting, for any other nominee in accordance with their judgment.
The following pages contain biographical and other information about each of the nominees. In addition, we have provided information regarding some of the particular experiences, qualifications, attributes and skills that led the Board to conclude that each nominee should serve as a director.
Unless instructed otherwise, the proxyholders will vote the proxies received by them "FOR" the election of the director nominees listed below.
WESLEY G. BUSH, 57
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Chairman, Northrop Grumman Corporation.
 
Director since September 2009


 
 
 
Mr. Wesley G. Bush served as Chief Executive Officer of the Company from January 2010 through December 31, 2018. He was elected to the Board of Directors in 2009 and elected Chairman of the Board of Directors in July 2011, and continues in his role as Chairman. Mr. Bush served as Chief Executive Officer and President of the Company from January 2010 through December 31, 2017, as President and Chief Operating Officer of the Company from March 2007 through December 2009, as President and Chief Financial Officer from May 2006 through March 2007, and as Corporate Vice President and Chief Financial Officer from March 2005 to May 2006. Following the acquisition of TRW Inc. (TRW) by the Company, he was named Corporate Vice President and President of the Space Technology sector. Mr. Bush joined TRW in 1987 and during his career with that company held various leadership positions, including President and CEO of TRW Aeronautical Systems. He is a member of the Board of Directors of General Motors Corporation and also served as a director of Norfolk Southern Corporation during the last five years. He also serves on the boards of several non-profit organizations, including Conservation International and INOVA Health System.
Attributes, Skills and Qualifications
    Significant business experience with over 35 years in the aerospace and defense industry
    Prior leadership positions within Northrop Grumman (including as Chief Executive Officer, President, Chief Operating Officer, Chief Financial Officer and Sector President)
   Extensive international business experience
    Extensive leadership roles in community service


6 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


PROPOSAL ONE: ELECTION OF DIRECTORS



MARIANNE C. BROWN, 60
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Co-Chief Operating Officer, Global Financial Solutions, Fidelity National Information Services, Inc., a financial services technology solutions provider.

Director since March 2015

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

DONALD E. FELSINGER, 71
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Lead Independent Director of the Board of Directors, Northrop Grumman Corporation.

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

Director since February 2007

Member of the Compensation Committee and Governance Committee
 
 
 
Mr. Donald E. Felsinger is the former Chairman and Chief Executive Officer of Sempra Energy. From July 2011 through his retirement in November 2012, he served as Executive Chairman of the Board of Directors of Sempra Energy, and from February 2006 through June 2011, he was Sempra's Chairman and CEO. Prior to that, Mr. Felsinger was President and Chief Operating Officer of Sempra Energy from January 2005 to February 2006 and a member of the Board of Directors. From 1998 through 2004, he was Group President and Chief Executive Officer of Sempra Global. Prior to the merger that formed Sempra Energy, he served as President and Chief Operating Officer of Enova Corporation, the parent company of San Diego Gas & Electric (SDG&E). Prior positions included President and Chief Executive Officer of SDG&E, Executive Vice President of Enova Corporation and Executive Vice President of SDG&E. Mr. Felsinger serves on the Boards of Directors of Archer-Daniels-Midland (Lead Independent Director) and Gannett Co., Inc.
Attributes, Skills and Qualifications
    Extensive business experience as Chief Executive Officer, a board member and Chairman of other Fortune 500 companies in regulated industries
    Significant experience in corporate governance and strategy, and as Lead Independent Director of a Fortune 250 company
   In-depth knowledge of executive compensation and benefits


NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 7


PROPOSAL ONE: ELECTION OF DIRECTORS



ANN M. FUDGE, 67
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Former Chairman and Chief Executive Officer, Young & Rubicam Brands, a marketing communications company.
 
Director since March 2016
 
Member of the Audit Committee and Governance Committee
 
 
 
Ms. Ann M. Fudge served as Chairman and Chief Executive Officer of Young & Rubicam Brands at WPP Group PLC from May 2003 to December 2006. Prior to that, she served in various leadership positions at Kraft Foods from 1986 to 2001, including President of Beverages, Desserts and Post Divisions, and President of Maxwell House Coffee and Kraft General Foods. From 1977 to 1986, Ms. Fudge held a variety of marketing positions at General Mills. She is a director of Novartis AG, and served as a director of General Electric Company, Infosys Limited and Unilever N.V. during the last five years. Ms. Fudge is the Chair of the Board of Trustees of WGBH Public Media and a trustee of the Brookings Institution. She also serves on the Advisory Board of the Smithsonian Institution's National Museum of African American History and Culture, and as Chair of the U.S. Programs Advisory Panel of the Gates Foundation.
Attributes, Skills and Qualifications
    Extensive business experience as former Chief Executive Officer and former president of leading consumer products business units
    Substantial international experience through service as an executive and director of a large multinational company and a director of other large multinational companies
   Significant public company board experience
   Experience with talent development and acquisition

BRUCE S. GORDON, 73
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Former President, Retail Markets Group, Verizon Communications Inc., a telecommunications company, and Former President & CEO, NAACP.
 
Director since October 2008
 
Member of the Compensation Committee and Policy Committee
 
 
 
 
Mr. Bruce S. Gordon served as President and Chief Executive Officer of the National Association for the Advancement of Colored People from June 2005 to March 2007. In 2003, Mr. Gordon retired from Verizon Communications Inc., where he had served as President, Retail Markets Group since 2000. Prior to that, Mr. Gordon served as Group President of the Enterprise Business Unit, President of Consumer Services, Vice President of Marketing and Sales and Vice President of Sales for Bell Atlantic Corporation (Verizon's predecessor). He is a member of the board of directors of the Newport Festival Foundation and a member of the Executive Leadership Council. Mr. Gordon served as a director of CBS Corporation and as the Non-Executive Chair of The ADT Corporation during the last five years. He currently serves as a diversity consultant to several Fortune 500 companies.
Attributes, Skills and Qualifications
  Extensive leadership and business skills acquired from his experience with corporate and non-profit enterprises
  National leader on issues of diversity and inclusion
    Significant board experience, including as non-executive chair


8 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


PROPOSAL ONE: ELECTION OF DIRECTORS



WILLIAM H. HERNANDEZ, 70
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Former Senior Vice President and Chief Financial Officer, PPG Industries, Inc., a manufacturer of chemical and industrial products.
 
Director since September 2013
 
Member of the Audit Committee (Chair) and Governance Committee 
 
 
 
Mr. William H. Hernandez served as Senior Vice President, Finance, and Chief Financial Officer of PPG Industries, Inc. (PPG), from 1995 until his retirement in 2009. Prior to that, he was PPG's corporate controller from 1990 to 1994. Mr. Hernandez previously held a number of positions with Borg-Warner Corporation and Ford Motor Company. Mr. Hernandez is a certified management accountant and has taught finance and management courses at Marietta College. He is a member of the Boards of Directors of Albemarle Corporation and USG Corporation and served as director of Black Box Corporation during the last five years.
Attributes, Skills and Qualifications
   Extensive experience and expertise in areas of finance, accounting and business management acquired as Chief Financial Officer of PPG Industries
    Significant experience in areas of risk management
    Audit committee financial expert

MADELEINE A. KLEINER, 67
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Former Executive Vice President and General Counsel, Hilton Hotels Corporation, a hotel and resort company.
 
Director since October 2008
 
Member of the Audit Committee and Governance Committee (Chair)
 
 
 
 
Ms. Madeleine A. Kleiner served as Executive Vice President, General Counsel and Corporate Secretary for Hilton Hotels Corporation from January 2001 until February 2008. From 1999 through 2001, she served as a director of a number of Merrill Lynch mutual funds operating under the Hotchkis and Wiley name. Ms. Kleiner served as Senior Executive Vice President, Chief Administrative Officer and General Counsel of H.F. Ahmanson & Company and its subsidiary, Home Savings of America, until the company was acquired in 1998, and prior to that was a partner at the law firm of Gibson, Dunn and Crutcher where she advised corporations and their boards primarily in the areas of mergers and acquisitions, corporate governance and securities transactions and compliance. Ms. Kleiner currently serves on the Board of Directors of Jack in the Box Inc.
Attributes, Skills and Qualifications
   Expertise in corporate governance, Sarbanes-Oxley controls, risk management, securities transactions and mergers and acquisitions
   Significant experience from past roles as general counsel for two public companies, outside counsel to numerous public companies and through service on another public company board
    Audit committee financial expert


NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 9


PROPOSAL ONE: ELECTION OF DIRECTORS



KARL J. KRAPEK, 70
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Former President and Chief Operating Officer, United Technologies Corporation, an aerospace and building systems company.
 
Director since September 2008
 
Member of the Compensation Committee and Governance Committee
 
 
 
 
Mr. Karl J. Krapek served as President and Chief Operating Officer of United Technologies Corporation from 1999 until his retirement in January 2002. At United Technologies Corporation, he served for 20 years in various leadership positions, including Executive Vice President and director in 1997, President and Chief Executive Officer of Pratt & Whitney in 1992, Chairman, President and Chief Executive Officer of Carrier Corporation in 1990 and President of Otis Elevator Company in 1989. Prior to joining United Technologies Corporation, he was Manager of Car Assembly Operations for the Pontiac Motor Car Division of General Motors Corporation. In 2002, Mr. Krapek became a co-founder of The Keystone Companies, which develops residential and commercial real estate. He serves on the Board of Directors of Trinity Health of New England. Mr. Krapek is a member of the the Boards of Directors of Prudential Financial, Inc. and Pensare Acquisition Corp.
Attributes, Skills and Qualifications
    Extensive industry experience and leadership skills
    Deep operational experience in aerospace and defense, domestic and international business operations and technology and lean manufacturing
    Significant public company board experience, including serving as Lead Independent Director

GARY ROUGHEAD, 67
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Admiral, United States Navy (Ret.) and Former Chief of Naval Operations.
 
Director since February 2012
 
Member of the Compensation Committee and Policy Committee (Chair)
 
 
 
 
Admiral Gary Roughead retired from his position as the 29th Chief of Naval Operations in September 2011, after serving in that position for four years. The Chief of Naval Operations is the senior military position in the United States Navy. As Chief of Naval Operations, Admiral Roughead stabilized and accelerated ship and aircraft procurement plans and the Navy's capability and capacity in ballistic missile defense and unmanned air and underwater systems. He restructured the Navy to address the challenges and opportunities in cyber operations. Prior to becoming the Chief of Naval Operations, he held six operational commands (including commanding both the Atlantic and Pacific Fleets). Admiral Roughead is a Robert and Marion Oster Distinguished Military Fellow at the Hoover Institution. He is a director of Maersk Line, Limited. He also serves as a trustee of the Dodge and Cox Funds. Admiral Roughead serves as a trustee of Johns Hopkins University and serves on the Board of Managers of the Johns Hopkins University Applied Physics Lab. He is a director of the Center for a New American Security.
Attributes, Skills and Qualifications
    Extensive career as a senior military officer with the United States Navy, including numerous operational commands, as well as leadership positions, most recently as the 29th Chief of Naval Operations
    Significant expertise in national security, information warfare, cyber operations and global security issues
   Broad experience in leadership and matters of global relations, particularly in the Pacific region, Europe and the Middle East
   Experience with talent development and management







10 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


PROPOSAL ONE: ELECTION OF DIRECTORS



THOMAS M. SCHOEWE, 66
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Former Executive Vice President and Chief Financial Officer, Wal-Mart Stores, Inc., an operator of retail stores.
 
Director since August 2011
 
Member of the Compensation Committee (Chair) and Policy Committee
 
 
 
Mr. Thomas M. Schoewe was Executive Vice President and Chief Financial Officer of Wal-Mart Stores Inc. from 2000 to 2011. Prior to his employment with Wal-Mart, he held several roles at the Black and Decker Corporation, including Senior Vice President and Chief Financial Officer from 1996 to 1999, Vice President and Chief Financial Officer from 1993 to 1999, Vice President of Finance from 1989 to 1993 and Vice President of Business Planning and Analysis from 1986 to 1989. Before joining Black and Decker, Mr. Schoewe worked for Beatrice Companies, where he was Chief Financial Officer and Controller of one of its subsidiaries, Beatrice Consumer Durables Inc. Mr. Schoewe serves on the Boards of Directors of General Motors Corporation and KKR & Co. Inc. Mr. Schoewe also serves on the board of the Ladies Professional Golf Association.
Attributes, Skills and Qualifications
    Extensive financial experience acquired through positions held as the Chief Financial Officer of large public companies, as well as expertise in Sarbanes-Oxley controls, risk management and mergers and acquisitions
    Significant international experience through his service as an executive of large public companies with substantial international operations
    Experience at Wal-Mart and Black and Decker on large-scale transformational enterprise information technology implementations
    Extensive experience as a member of the audit and risk committees of other public companies

JAMES S. TURLEY, 63
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Former Chairman and Chief Executive Officer, Ernst & Young, a professional services organization.
 
Director since February 2015
 
Member of the Audit Committee and Governance Committee
 
 
 
Mr. James S. Turley served as Chairman and Chief Executive Officer of Ernst & Young from 2001 until his retirement in 2013. Mr. Turley joined Ernst & Young in 1977 and held various positions there until being named regional managing partner for the Upper Midwest in 1994, and for New York in 1998. He was named Deputy Chairman in 2000. He currently serves on the Boards of Directors of Citigroup, Emerson Electric Company and Intrexon Corporation. He also serves on the Board of Directors of the Boy Scouts of America. Mr. Turley is a board member of Kohler Co. and serves as Non-Executive Chair of Sita Capital Partners LLP.
Attributes, Skills and Qualifications
    Extensive experience and expertise in areas of finance, accounting and business management acquired over 36-year career at Ernst & Young, including serving as Chairman and Chief Executive Officer of Ernst & Young
    Significant experience in areas of risk management
    Extensive experience as a member of the audit committee of other public companies
    Audit committee financial expert


NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 11


PROPOSAL ONE: ELECTION OF DIRECTORS



KATHY J. WARDEN, 47
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Chief Executive Officer and President, Northrop Grumman Corporation.
 
Director since July 2018

 
 
 
Ms. Kathy J. Warden has served as Chief Executive Officer and President of the Company since January 2019. She was elected to the Board of Directors in July 2018. Ms. Warden served as President and Chief Operating Officer of the Company from January 2018 through December 2018, as Corporate Vice President and President of the Company's Mission Systems Sector from 2016 through 2017, as Corporate Vice President and President of the Company's former Information Systems Sector from 2013 to 2015, and as Vice President of the Company's Cyber Intelligence Division from 2011 to 2012. Prior to joining the Company in 2008, Ms. Warden held leadership roles at General Dynamics and Veridian Corporation. Earlier, she was a principal in a venture internet firm and also spent nearly a decade with General Electric Company working in commercial industries. She is the Chair of the Board of Directors of the Federal Reserve Bank of Richmond and a member of the Board of Visitors of James Madison University.
Attributes, Skills and Qualifications
    Extensive experience in operational leadership, strategy, performance and business development in government and commercial markets, including cyber expertise
    Prior leadership positions within Northrop Grumman (including as President, Chief Operating Officer and President of two business sectors)
    Significant aerospace and defense industry experience

MARK A. WELSH III, 65
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Dean of the Bush School of Government and Public Service, Texas A&M University; General, United States Air Force (Ret.); Former Chief of Staff, United States Air Force.
 
Director since December 2016
 
Member of the Audit Committee and Policy Committee
 
 
 
General Mark A. Welsh III has been the Dean of the Bush School of Government and Public Service at Texas A&M University since August 2016. Prior to his current position, General Welsh served as Chief of Staff of the United States Air Force, the senior uniformed Air Force officer responsible for the organization, training and equipping of active-duty, Guard, Reserve and civilian forces serving in the United States and overseas. During his long career, General Welsh also served as a member of the Joint Chiefs of Staff, Commander of the United States Air Forces in Europe and Commander of NATO's Air Command, Associate Director for Military Affairs at the Central Intelligence Agency and Commandant of the United States Air Force Academy. General Welsh is a member of the Board of Managers of Peak NanoSystems, LLC. He is also a director of the Air Force Association.
Attributes, Skills and Qualifications
   Extensive career as a senior military officer and member of the Joint Chiefs of Staff, having held leadership positions at the highest levels of the United States Air Force
   Extensive experience and in-depth knowledge of issues related to global security and the intelligence community
    Broad leadership experience and international experience, particularly in Europe
    Experience with talent development and management

12 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


PROPOSAL ONE: ELECTION OF DIRECTORS



Vote Required
To be elected, a nominee must receive more votes cast "for" than votes cast "against" his or her election. Abstentions and broker non-votes will have no effect on this proposal. If a nominee is not re-elected, he or she will remain in office until a successor is elected or until his or her earlier resignation or removal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
"FOR" THE 13 NOMINEES FOR DIRECTOR LISTED ABOVE.

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 13


CORPORATE GOVERNANCE


Overview
We are committed to maintaining high standards of corporate governance, aligned with our focus on sustainable performance and profitable growth, and our core values of ethics and compliance. With strong oversight from the Board, our corporate governance regime is intended to promote the long-term success of our Company to benefit our shareholders, customers and employees.
  
Our Company has adopted Principles of Corporate Governance and Standards of Business Conduct to
help guide and promote our good corporate governance and responsible business practices.
Our Principles of Corporate Governance outline the role and responsibilities of our Board and the high standards our directors maintain. They set forth additional independence requirements for our directors and provide guidelines for Board leadership and Board and Committee membership, among other items. The Board reviews these principles at least annually and considers opportunities for improvement and modification.
Our Standards of Business Conduct reflect and reinforce our commitment to integrity and ethics in all we do. They apply to our directors, officers and all employees.
Among other things, our Standards of Business Conduct:    
require high ethical standards in all aspects of our business;
require strict adherence to all applicable laws and regulations;
reflect our commitment to maintaining a culture that values and promotes diversity and inclusion;
reinforce our commitment to being a responsible corporate citizen;
reflect our commitment to our work environment and the global communities where we live, work and serve;
require the consistent production of quality results; and
call upon all employees to raise any questions or issues of concern (including on an anonymous basis).
We report amendments to provisions of our Standards of Business Conduct on our website.
Role of the Board
The primary responsibility of our Board is to foster the long-term success of the Company, promoting the interests of our shareholders. Our directors exercise their business judgment in a manner they reasonably believe to be in the best interests of the Company and our shareholders and in a manner consistent with their fiduciary responsibilities. The responsibilities of the Board include, but are not limited to, the following:
oversee our long-term business strategies, operations and performance;
execute robust succession planning; select the Chief Executive Officer and elect officers of the Company;
oversee our major risks and risk management activities; including with regard to cyber and other security risks;
oversee senior executive succession planning and our human capital strategy;
ensure effective corporate governance practices;
elect directors to fill vacant positions between Annual Meetings;
review and approve executive compensation;
review and approve significant corporate actions;
oversee and evaluate management and Board performance;
oversee our ethics and compliance programs;
oversee our diversity and inclusion programs; and
provide advice to management.

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CORPORATE GOVERNANCE


Board's Role in Risk Oversight
As noted above, the Board is responsible for overseeing our risk management activities, among other duties. Each of our Board committees assists the Board in this role.
The Audit Committee focuses on risks that could impact our financial performance. The Audit Committee periodically receives a report from the Chief Financial Officer and members of the Finance Department addressing our financial risk management processes, systems and internal controls, the nature of the material financial risks the Company faces and how the Company responds to and mitigates these risks. The Audit Committee periodically receives a report from our General Counsel on legal and other compliance risks and how the Company is addressing and mitigating those risks. The Audit Committee receives an annual report from our Chief Compliance Officer on the Company's compliance program overall. The Audit Committee also receives quarterly reports from the Vice President, Global Corporate Responsibility on trends in ethics reporting.
The Compensation Committee reviews at least annually a risk assessment of the Company's compensation programs and, together with its independent compensation consultant, evaluates the mix of at-risk compensation linked to stock appreciation.
The Policy Committee assists the Board in identifying and evaluating global security, political, public relations, environmental sustainability and budgetary issues and trends that could impact the Company's business. The Policy Committee periodically receives a report from the Vice President, Global Corporate Responsibility on the Company’s ethics and corporate responsibility programs.
The Governance Committee regularly reviews the Company's policies and practices on issues of corporate governance, and considers issues of succession and composition of the Board, recommending proposed changes to the full Board for approval.
The Board and its Committees provide oversight of the Company's risk management processes, including the Enterprise Risk Management Council (ERMC). The ERMC is comprised of all members of the Corporate Policy Council, the Chief Accounting Officer, Chief Compliance Officer, Corporate Secretary, head of Internal Audit and Treasurer. The ERMC seeks to ensure that the Company has identified the most significant risks and implemented effective mitigation plans for each. The full Board has responsibility for oversight of cyber and other security risks, and receives periodic briefings from our Vice President and Chief Information Security Officer.
Board Leadership Structure
Chairperson of the Board
Our Bylaws provide that our directors will designate a Chairperson of the Board from among its members. The Chairperson presides at all Board and shareholder meetings. The Chairperson interacts directly with all members of the Board and assists the Board to fulfill its responsibilities. As the Principles of Corporate Governance provide, the Board believes it is in the best interests of the Company and the shareholders for the Board to have flexibility to determine the best director to serve as Chairperson of the Board at the time, based on consideration of all relevant factors.
Following our 2018 Annual Meeting the Board reviewed its leadership structure and determined that the appropriate leadership structure at the time was for Mr. Bush, who was then our Chief Executive Officer, to continue to serve as Chairman. The Board concluded that having our Chief Executive Officer serve as Chairman was an appropriate leadership structure for the Company and best positioned the Company to be innovative, compete successfully, present one face to our customer and advance shareholder interests in today's environment. The Board continues to believe that Mr. Bush's deep understanding of the Company's business, day-to-day operations, growth opportunities, challenges and risk management practices gained through various leadership positions enables him to provide strong and effective leadership to the Board and to ensure that the Board is informed of important issues facing the Company. The Board consists entirely of independent directors, other than Mr. Bush and Ms. Warden, and continues to exercise a strong, independent oversight function, with fully independent Board Committees and a strong Lead Independent Director with clearly articulated responsibilities.
In July 2018, the Board elected Ms. Warden to the position of Chief Executive Officer and President, effective January 1, 2019, and elected Ms. Warden to the Board, effective July 12, 2018. The Board determined that Mr. Bush should continue as Chairman of the Board through July 2019, when he will retire from the Company. As required by the Company's Principles of Corporate Governance, Mr. Bush has stated his intent to submit his resignation to the Board of Directors effective upon his retirement from the Company. The Board will continue to review and discuss the leadership structure of the Board and determine the leadership structure, including the Chairperson, that continues best to meet the needs of the Company.

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CORPORATE GOVERNANCE


Lead Independent Director
If the Chairperson is not independent, the independent directors will designate annually from among them a Lead Independent Director. Following our 2018 Annual Meeting, the independent directors designated Mr. Felsinger as Lead Independent Director.
Our Principles of Corporate Governance set forth specific duties and responsibilities of the Lead Independent Director, which include the following:
preside at meetings of the Board at which the Chairperson is not present, including executive sessions of the independent directors, and advise the Chairperson and CEO on decisions reached and suggestions made;
advise the Chairperson on and approve meeting agendas and information sent to the Board;
advise the Chairperson on and approve the schedule of Board meetings, assuring there is sufficient time for discussion of all agenda items;
provide the Chairperson with input as to the preparation of Board and committee meeting agendas, taking into account the requests of the other Board and committee members;
interview, along with the Chairperson and the Chairperson of the Governance Committee, Board candidates and make recommendations to the Governance Committee and the Board;
call meetings of the independent directors;
support and facilitate engagement between the Chairperson and the independent directors; and
if requested by major shareholders, ensure that he or she is available for consultation and direct communication.
Our Lead Independent Director is empowered to and does actively engage with our Chairperson and Chief Executive Officer to help enable a strong and effective Board of Directors.
Committees of the Board of Directors
The Board has four standing committees: the Audit Committee, the Compensation Committee, the Governance Committee and the Policy Committee. The membership of these committees is typically determined at the organizational meeting of the Board held in conjunction with the annual meeting. All the committees are composed entirely of independent directors. The primary responsibilities of each of the committees are summarized below, together with a table listing the membership and chairperson of each committee. The charters for each standing committee can be found on the Investor Relations section of our website (www.northropgrumman.com).

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CORPORATE GOVERNANCE


Audit Committee
Roles and Responsibilities
Committee Members
Assist the Board in overseeing (1) the integrity of the Company's financial statements and the Company's accounting and financial reporting processes; (2) the Company's overall compliance with legal and regulatory requirements; (3) financial risk assessment and management; (4) the qualifications, performance and independence of the Company's independent auditor; (5) the performance of the Company's internal audit function; and (6) the Company's system of disclosure controls and procedures and internal control over financial reporting, by:
William H. Hernandez (chair)
Ann M. Fudge
Madeleine A. Kleiner
James S. Turley
Mark A. Welsh III
 
Number of meetings in 2018:  10
 
Independence, Financial Literacy and Audit Committee Financial Experts
  
All members are independent and financially literate
 
Ms. Kleiner and Messrs. Hernandez and Turley each qualifies as an Audit Committee Financial Expert

    appointing, retaining, overseeing, evaluating and terminating, if necessary, the independent auditor
    reviewing and pre-approving audit and permitted non-audit services and related fees for the independent auditor
    reviewing and discussing the Company's Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q
    reviewing and discussing management's assessment of, and report on, the effectiveness of the Company's internal control over financial reporting at least annually and the independent auditor's related report
    reviewing and discussing with the independent auditor the Company's critical accounting policies, and material written communications with management
    reviewing with the General Counsel, at least annually, the status of significant pending litigation and various other significant legal, compliance or regulatory matters
    reviewing with the Chief Compliance Officer, at least annually, the Company's compliance program
    discussing guidelines and policies regarding risk assessment and risk management
    reviewing any significant issues raised by the internal audit function and, as appropriate, management's actions for remediation
    establishing and periodically reviewing and discussing with management the Company's procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters
Compensation Committee
Roles and Responsibilities
Committee Members
Assist the Board in overseeing the Company's compensation policies and practices by:
Thomas M. Schoewe (chair)
Marianne C. Brown
Donald E. Felsinger
Bruce S. Gordon
Karl J. Krapek
Gary Roughead
 
Number of meetings in 2018:  7
 
Independence
 
All members are independent
    approving the compensation for elected officers (other than the Chief Executive Officer, whose compensation is recommended by the Committee and approved by all the independent directors)
    establishing stock ownership guidelines and reviewing ownership levels on an annual basis
    administering incentive and equity compensation plans and approving payments or grants under these plans for elected officers (other than the Chief Executive Officer)
    recommending for approval compensation for the non-employee directors, after consultation with the independent compensation consultant
    producing an annual report on executive compensation for inclusion in the proxy statement
    providing support to the Board in carrying out its overall responsibilities related to executive compensation


NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 17


CORPORATE GOVERNANCE


Governance Committee
Roles and Responsibilities
Committee Members
Assist the Board in overseeing the Company's corporate governance practices by:
Madeleine A. Kleiner (chair)
Donald E. Felsinger
Ann M. Fudge
William H. Hernandez
Karl J. Krapek
James S. Turley
 
Number of meetings in 2018:  5
 
Independence
 
All members are independent

    regularly reviewing the Company's corporate governance policies and practices, including the Principles of Corporate Governance and the Company's Bylaws
    regularly reviewing and considering corporate governance developments, emerging trends and best practices and recommending changes to the Board
    reviewing and making recommendations with respect to shareholder proposals and the results of shareholder proposals, if any, voted on at a shareholders meeting
    regularly reviewing and making recommendations to the Board regarding the composition and size of the Board and the criteria for Board membership, which should include, among other things, diversity, experience and integrity
    providing effective board succession planning, identifying and recommending to the Board qualified potential candidates to serve on the Board and its committees and, if applicable, meeting with proxy access nominees nominated through the Company's proxy access bylaw provision
    reviewing and determining whether a director's service on another board or elsewhere is likely to interfere with the director's duties and responsibilities as a member of the Board
    reviewing and recommending board, director and committee evaluation processes and coordinating the process for the Board to evaluate its performance
Policy Committee
Roles and Responsibilities
Committee Members
Assist the Board in overseeing policy, government relations and corporate responsibility by:
Gary Roughead (chair)
Marianne C. Brown
Bruce S. Gordon
Thomas M. Schoewe
Mark A. Welsh III
  
Number of meetings in 2018: 4
  
Independence
 
All members are independent
   identifying and evaluating global security, political, budgetary and other issues and trends that could impact the Company's business activities and performance
    reviewing and providing oversight over the Company's ethics and corporate responsibility policies and programs
    reviewing the Company's public relations branding strategy
    reviewing and monitoring the Company's government relations strategy and political action committee
    reviewing the Company's community relations activities
    reviewing and providing oversight of the Company's environmental sustainability program

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CORPORATE GOVERNANCE


Board Meetings and Executive Sessions
The Board meets no fewer than nine times each year (including via telephonic meetings). Special meetings of the Board may be called from time to time as appropriate. On an annual basis, the Board holds an extended meeting to review our long-term strategy.
The Board holds its meetings at Company locations other than our corporate headquarters on a regular basis to provide the directors with a first-hand view of different elements of our business and an opportunity to interact with local management.
The Board meets in executive session (with the directors only and then with the independent directors only) following each in-person Board meeting and on other occasions as needed. The non-executive Chairperson or the Lead Independent Director presides over the executive sessions of the independent directors. The Audit Committee meets in executive session at each in-person Audit Committee meeting, and regularly requests separate executive sessions with representatives of our independent auditor and our senior management, including our Chief Financial Officer, General Counsel and our Vice President, Internal Audit. The Compensation Committee also meets in executive session from time to time and regularly receives a report from the Compensation Committee's independent compensation consultant. The Governance and Policy Committees also meet in executive session as they deem necessary.
Meeting Attendance
During 2018, the Board held 10 meetings. Each incumbent director serving in 2018 attended 75% or more of the total number of Board and committee meetings he or she was eligible to attend. Board members are expected to attend each annual meeting, except where the failure to attend is due to unavoidable circumstances. All of our then-serving directors attended the 2018 Annual Meeting.
Director Independence
The Board has established an objective that at least 75% of our directors be independent directors. The Board and the Governance Committee annually review the relevant relationships or arrangements between the Company and our directors or parties related to the directors in determining whether such directors are independent. No director is considered independent unless the Board has determined that the director meets the independence requirements under applicable New York Stock Exchange (NYSE) and SEC rules and under our categorical independence standards, which are described in our Principles of Corporate Governance. For a director to be considered independent, the Board must determine that a director has no material relationship with the Company other than as a director.
Our Principles of Corporate Governance provide that a director may be found not to qualify as an independent director if the director:
has within the prior three years been a director, executive officer or trustee of a charitable organization that received annual contributions from the Company exceeding the greater of $1 million or 2% of the charitable organization's annual gross revenues, where the gifts were not normal matching charitable gifts, did not go through normal corporate charitable donation approval processes or were made "on behalf of" a director;
has, or has an immediate family member who has, within the prior three years been employed by, a partner in or otherwise affiliated with any law firm or investment bank in which the director's or the immediate family member's compensation was contingent on the services performed for the Company or in which the director or the immediate family member personally performed services for the Company and the annual fees paid by the Company during the preceding fiscal year exceeded the greater of $1 million or 2% of the gross annual revenues of such firm; or
has, or has an immediate family member who has, within the prior three years owned, either directly or indirectly as a partner, shareholder or officer of another company, more than 5% of the equity of an organization that has a material business relationship with (including significant purchasers of goods or services), or more than 5% ownership in, the Company.

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 19


CORPORATE GOVERNANCE


Independence Determination
In connection with their annual independence review, the Board and Governance Committee considered the following relationships with organizations to which we have made payments or from which we have received payments in the usual course of our business in 2018.
Mr. Felsinger's service as a member of the Board of Directors of Archer-Daniels-Midland;
Mr. Gordon's service as a member of the Board of Directors of CBS Corporation;
Mr. Hernandez's service as a member of the Board of Directors of Albemarle Corporation;
Admiral Roughead's service as a member of the Board of Directors of the Center for a New American Security, a trustee of Johns Hopkins University and a member of the Board of Managers of Johns Hopkins University Applied Physics Lab;
Mr. Schoewe's service as a member of the Board of Directors of General Motors; and
Mr. Turley's service as a member of the Board of Directors of Citigroup and Emerson Electric.
The Board of Directors considered that Ms. Fudge, Mr. Gordon, Ms. Kleiner, Mr. Turley and General Welsh served as members of the boards of, or are otherwise affiliated with, organizations to which the Company and/or the Northrop Grumman Foundation (Foundation) made contributions during 2018 in the usual course of our charitable contributions program, as well as in connection with our matching gifts program (which limits the contributions to $10,000 per year per director). The amounts paid were below the applicable thresholds under NYSE rules and our Principles of Corporate Governance.
Following its review and the recommendation of the Governance Committee, the Board affirmatively determined that all of the directors, except Mr. Bush and Ms. Warden, are independent. The independent directors constitute approximately 85% of the members of our Board. The Board previously determined that Victor H. Fazio, who served as a director until his retirement from the Board effective the date of the 2018 Annual Meeting, was independent during the time he was a director.
Director Election Process
Our Bylaws and Certificate of Incorporation provide for the annual election of directors. Each director will hold office until the next annual meeting of shareholders or until his or her earlier resignation or removal. Generally, in order to be elected, a director must receive more votes cast "for" than "against" his or her election, unless one or more shareholders provide notice of an intention to nominate one or more candidates to compete with the Board's nominees for election in accordance with the procedures set forth in the Company's corporate governance documents.
Board Composition and Director Nominations
The Governance Committee actively considers the composition and diversity of the Board to ensure it is well positioned to serve the best interests of the Company and our shareholders. The Governance Committee regularly assesses what skills, experiences and other attributes can best contribute to the effective operation of the Board, particularly in light of the evolving needs of the Company. The Governance Committee identifies director candidates from a wide range of sources and may employ a third-party search firm to assist in the process.  
The Governance Committee evaluates potential director candidates on the basis of the candidate's background, qualifications and experience. The Governance Committee carefully considers whether each potential candidate would be able to fulfill his or her duties to the Company consistent with Delaware law and the Company’s governing documents, including the Principles of Corporate Governance. The Committee recommends to the full Board nominees for election.
Shareholders may recommend director candidates for consideration by the Governance Committee pursuant to our Principles of Corporate Governance. The Governance Committee considers such director candidates recommended by shareholders similarly to other potential director candidates brought to the attention of the Governance Committee. Shareholder recommendations for director candidates under our Principles of Corporate Governance must be addressed to the Governance Committee in care of the Corporate Secretary. In addition, and as discussed immediately below, shareholders may also directly nominate director candidates in accordance with our Bylaws.

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The Board carefully considered and adopted a strong and balanced proxy access framework 
For more than a year, the Board carefully considered the issue of proxy access. The Board and management engaged extensively with shareholders and monitored developments and best practices regarding proxy access. Management solicited and received input from shareholders, our customers and other stakeholders. The Board amended our Bylaws to provide our shareholders the right to proxy access, reflecting this extensive consideration and input.
Under the Company’s proxy access bylaws, a shareholder, or a group of up to 20 shareholders, that has maintained continuous ownership of 3% or more of the Company's outstanding common stock for at least three years may include in the Company's proxy materials director nominees constituting up to the greater of two nominees or nominees constituting 20% of the number of directors in office. Director nominees may receive compensation from third parties for their candidacy, up to the total annual compensation paid to directors of the Company, as well as reimbursement for reasonable expenses, provided there is full disclosure of such compensation. Under the Company’s bylaw provisions, directors are treated similarly, whether nominated through proxy access or otherwise, and held to the same high fiduciary standards to serve all shareholders. 
The Company's Bylaws provide our shareholders with broad and meaningful access to the Company’s proxy materials while enhancing transparency, protecting the interests of all shareholders and ensuring good governance. The terms of the Company’s proxy access bylaw provisions are also broadly consistent with the terms of proxy access bylaws adopted by other Fortune 500 companies, reflecting best practices.  
Director Qualifications
The Governance Committee is responsible for establishing the criteria for Board membership. In nominating directors, the Governance Committee bears in mind that the foremost responsibility of a director is to represent the interests of our shareholders as a whole. The activities and associations of candidates are reviewed for any legal impediment, conflict of interest or other consideration that might prevent or interfere with service on our Board.
In evaluating candidates, the Governance Committee considers:
the personal integrity and the professional reputation of the individual;
the education, professional background and particular skills and experience most beneficial to service on our Board;
how the nominee brings diversity, experience and skills valuable to the Company and Board at the time; and
whether a director candidate is willing to submit to and obtain a background check necessary for obtaining and retaining a top secret security clearance.
In evaluating director candidates, the Governance Committee aims to foster diversity of thought on our Board. The Governance Committee seeks to ensure diversity, including in race and gender, as well as in perspective, professional experience, education, skill and other qualities that contribute to our Board and the long-term interests of our Company and shareholders.
Director Orientation and Continuing Education
All new directors to the Board receive in-person orientation and training that is individually tailored, taking into account the director's experience, background, education and committee assignments. The orientation program is led by members of senior management and covers a review of our strategy and operating plans, financial statements, corporate governance and key policies and practices, as well as the roles and responsibilities of our directors.
All directors receive regular in-person training regarding our Company policies and procedures, and broad exposure to our operations and the teams. Members of senior management review with the Board the operating plan for each of our business sectors and the Company as a whole. The Board also conducts periodic site visits to our facilities as part of its regularly scheduled Board meetings. These visits allow directors to interact with a broader group of our executives and employees and gain firsthand insights into our operations.
Directors may also attend outside director and other continuing education programs to assist them in staying current on developments in corporate governance, our industry, the global environment and issues critical to the operation of public company boards.

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 21


CORPORATE GOVERNANCE


Board Membership and External Relationships
Directors are required to ensure that their other commitments, including for example, other board memberships, employment, partnerships and consulting arrangements, do not interfere with their duties and responsibilities as members of the Board. Directors provide notice to the General Counsel prior to accepting an invitation to serve on the board of any other organization, and the General Counsel advises the Chairperson of the Governance Committee (or the Chairperson of the Board, if notice is from the Chairperson of the Governance Committee). A director should not accept service on such other board unless advised by the Chairperson of the Governance Committee (or Chairperson of the Board, as appropriate) that such engagement will not unacceptably create conflicts of interest or regulatory issues, conflict with Company policies or otherwise interfere with the director's duties and responsibilities as a member of the Board. Directors are also required promptly to inform the General Counsel if an actual or potential conflict of interest arises, or they are concerned that a conflict may arise or circumstances could otherwise interfere with their duties and responsibilities as a director. Directors are required to seek to avoid even an appearance of an improper conflict of interest.
Directors may not serve on more than three other boards of publicly traded companies in addition to our Board without the written approval of the Chairperson of the Governance Committee (or Chairperson of the Board, as appropriate). A director who is a full-time employee of our Company may not serve on the board of more than two other public companies unless approved by the Board. When a director's principal occupation or business association changes substantially during his or her tenure as a director, the Board expects the director to tender his or her resignation for consideration by the Governance Committee, which subsequently will recommend to the Board what action to take.
We have a retirement policy whereby a director will retire at the annual meeting following his or her 75th birthday, unless the Board determines, based on special circumstances, that it is in the Company's best interest to request that the director serve beyond such date.
Effect of Failure to Receive the Required Vote or Obtain and Retain Security Clearance
Each director is required to tender a resignation that will be effective upon (i) the failure to receive the required vote at any future meeting at which such director faces re-election, the failure to obtain top secret security clearance within 12 months of election or appointment to the Board or the failure to retain a top secret security clearance once obtained and (ii) the Board's acceptance of such resignation. If an incumbent director fails to receive the required vote for re-election or fails to obtain and retain a top secret security clearance, the Governance Committee will consider whether the Board should accept the director's resignation and will submit a recommendation for prompt consideration by the Board. The Board will decide whether to accept or reject a resignation within 90 days, unless the Board determines that compelling circumstances require additional time. The Governance Committee and the Board may consider any factor they deem relevant in deciding whether to accept a resignation, including, without limitation, any harm to our Company that may result from accepting the resignation, and the underlying reasons for the action at issue.
Board and Committee Self-Evaluation
The Board and each Committee conduct annually thorough self-assessment processes. These processes are intended to ensure and enhance the effective operation of the Board.
The self-assessment of the Board is overseen by the Governance Committee. As part of this assessment, the Lead Independent Director and Chairperson of the Governance Committee facilitate a broad discussion of Board performance, held in executive session. Among other topics, the Board considers:
the Board's effectiveness in evaluating and monitoring the Company's business plan, long-term strategy and risks;
whether strategic and critical issues are being addressed by the Board in a timely manner;
whether the Board’s expectations and concerns are openly communicated to and discussed with the Chief Executive Officer;
whether there is adequate contact between the Board and members of senior management;
whether the directors collectively operate effectively as a Board;
whether the individual directors have the appropriate mix of attributes and skills to fulfill their duties as directors of the Company;

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CORPORATE GOVERNANCE


whether there are adequate opportunities to raise questions and comments on issues, both inside and outside of Board meetings;
whether the Board has focused adequately on succession planning; and
whether the Board is adequately responsive to shareholder communication.
Following this review, the Board discusses the results and identifies opportunities for improvement, including any necessary steps to implement such improvements.
Also as part of the annual self-assessment process, each non-employee director completes an individual director evaluation for each of the other non-employee directors. These assessments include, among other topics, each non-employee director’s:
understanding of the Company’s overall business and risk profile and its significant financial opportunities and plans;
engagement during meetings and other Board functions;
analysis of benefits and risks of courses of action considered by the Board; and
appropriate respect for the views of other Board members.
The Lead Independent Director or the Chairperson of the Governance Committee meets with each non-employee director individually to discuss the results of his or her assessment, including comments provided by other non-employee directors. The Lead Independent Director or the Chairperson of the Governance Committee reports generally on the overall results of these discussions to the Board in executive session. These evaluations also assist the Governance Committee with its recommendation for directors to be renominated for election to the Board of Directors.
Each of the Committees also conducts an annual self-assessment. During an executive session led by the Committee chairperson, the Committee discusses, among other topics: whether the quality of participation and discussion at the Committee meetings is effective in facilitating the Committee’s obligations under its charter; the opportunity to engage in strategic discussion; and whether the Committee is covering the right topics in the right amount of detail. Following this discussion, the Committee develops and implements a list of action items, as appropriate.
Succession Planning
The Board believes that providing for strong and effective continuity of leadership is critical to the success of our Company. The Board commits significant resources to succession planning, with processes in place for the Board:
to evaluate the Chief Executive Officer annually based on a specific set of performance objectives;
to work with the Chief Executive Officer to support and ensure the development of potential succession candidates for the Chief Executive Officer and other leadership positions;
to discuss with the Chief Executive Officer annually an assessment of persons considered potential successors to various senior management positions; and
robustly to consider, plan for and ensure successful transitions of leadership.
Departure and Election of Directors
Victor H. Fazio, a director who served during 2018, did not stand for re-election at the 2018 Annual Meeting and retired from the Board effective the date of the 2018 Annual Meeting.
On July 12, 2018, Kathy J. Warden was appointed to the Board.
Mr. Bush has announced that he will retire from the Company on July 31, 2019. Consistent with the requirements of the Company's Principles of Corporate Governance, Mr. Bush has stated his intention to submit his resignation from the Board of Directors at the time of his retirement from the Company. The Board has approved the reduction in the number of directors from 13 to 12 effective upon Mr. Bush's resignation.


NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 23


CORPORATE GOVERNANCE


Communications with the Board of Directors
Any interested person may communicate with any of our directors, our Board as a group, our non-employee directors as a group or our Lead Independent Director through the Corporate Secretary by writing to the following address: Office of the Corporate Secretary, Northrop Grumman Corporation, 2980 Fairview Park Drive, Falls Church, Virginia 22042. The Corporate Secretary will forward correspondence to the director or directors to whom it is addressed, except for job inquiries, surveys, business solicitations or advertisements and other inappropriate material. The Corporate Secretary may forward certain correspondence elsewhere within our Company for review and possible response.
Interested persons may also report any concerns relating to accounting matters, internal accounting controls or auditing matters to non-management directors (including anonymously) by writing directly to the Chairperson of the Audit Committee, Northrop Grumman Board of Directors c/o Corporate Ethics Office, 2980 Fairview Park Drive, Falls Church, Virginia 22042.
Corporate Responsibility
Corporate responsibility and sustainability are critical to our business and long-term value creation for our shareholders, customers and employees. Our strong culture — founded in ethics, integrity, diversity and inclusion, and focused on sustainable performance, profitable growth, accountability, effective governance and responsible citizenship — enables our success. Strong environmental, social and governance (ESG) programs and practices help us attract and maintain the best talent, perform for our customers and create value for our shareholders.
The Policy Committee of our Board provides leadership and oversight of our ESG practices. The Committee provides oversight of our policies and programs related to both corporate responsibility and sustainability, and regularly reviews our community relations activities, among other responsibilities. We engage with a variety of stakeholders and regularly obtain feedback on our ESG performance.
In 2018, we published our tenth annual corporate responsibility report (CRR). Using the GRI G4 Sustainability Reporting Guidelines, we continued to report to our stakeholders on our progress in meeting various environmental, social and governance performance indicators. You may view a copy of our annual CRR at crreport.northropgrumman.com. For the eighth consecutive year, we incorporated non-financial sustainability performance metrics into our annual incentive compensation program. See page 45 in the Compensation Discussion and Analysis section.
We are proud that our corporate responsibility and sustainability programs received various notable recognitions in 2018. They include:
a leadership score of A- in CDP’s 2018 climate change program for the seventh consecutive year;
the Catalyst award for our “Build the Best Culture, Leverage the Power of Women” campaign which drove significant increases in the percentage of women in our executive ranks;
an A rating from MSCI for environmental, social and governance management and performance;
Dow Jones Sustainability North America Index for the third consecutive year; and
one of DiversityInc's Top 50 Companies for Diversity for the ninth year in a row.
Aligned with, and an integral part of, our commitment to the highest standards of ethical conduct, is our respect for human rights. This respect is embedded in our culture, and reflected in the Company’s Human Rights Policy, which was adopted in 2013 and is available on the Company’s website at www.northropgrumman.com/CorporateResponsibility/Pages/HumanRightsPolicy.aspx
The Human Rights Policy provides, among other things, that the Company treats employees, suppliers, customers and competitors with dignity and respect. The Company does not tolerate any discrimination in employment based on an individual’s protected status. We do not tolerate the use of child labor, forced labor, bonded labor, human trafficking or other violations of human rights.  The Human Rights Policy provides employees with a well-defined reporting channel when they believe there may have been a violation of the Policy.
Our policy is further implemented through various of our human resources, contracting, and compliance programs. It is reinforced through communications and robust training at all levels of our Company. Both the Company’s policy and commitment are also implemented and enforced through our Standards of Business Conduct and our Supplier Standards of Business Conduct, which clearly articulates our requirement for ethical conduct and social responsibility at all tiers of our supply base.

24 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION OF DIRECTORS


The Compensation Committee, with the assistance of its independent compensation consultant, is responsible for reviewing and recommending for approval the compensation of the non-employee directors. At the request of the Compensation Committee, the independent compensation consultant prepares annually a comprehensive benchmarking of our non-employee director compensation program against the compensation programs offered by our Target Industry Peer Group (the same peer group against which executive compensation is compared). Consistent with this benchmarking, the overarching approach for non-employee director compensation is to target approximately the 50th percentile of the Target Industry Peer Group and to align our director compensation with our shareholders' interests.
In May 2018, the Compensation Committee recommended to the Board, and the Board approved, the current non-employee director fee structure, effective May 16, 2018. The table below lists the annual fees payable to our non-employee directors from January 1, 2018 to May 15, 2018 under the prior fee structure and the annual fees payable under the current fee structure effective May 16, 2018.
Compensation Element
 
Amount ($)
(1/1/18 - 5/15/18)
 
Amount ($)
(5/16/18 - 12/31/18)
 
Annual Cash Retainer
 
122,500
 
127,500
 
Lead Independent Director Retainer
 
35,000
 
35,000
 
Audit Committee Retainer
 
10,000
 
10,000
 
Audit Committee Chair Retainer
 
20,000
 
20,000
 
Compensation Committee Chair Retainer
 
20,000
 
20,000
 
Governance Committee Chair Retainer
 
15,000
 
20,000
 
Policy Committee Chair Retainer
 
7,500
 
20,000
 
Annual Equity Grant (1)
 
150,000
 
155,000
 
 
 
 
 
 
(1) The annual equity grant is deferred into a stock unit account pursuant to the 2011 Long-Term Incentive Stock Plan (2011 Plan) as described below. The Northrop Grumman Equity Grant Program for Non-Employee Directors (Director Program) sets forth the terms and conditions of the equity awards granted to non-employee directors under the 2011 Plan.
 

Retainer fees are paid on a quarterly basis at the end of each quarter. To encourage directors to have a direct and material investment in shares of our common stock, non-employee directors are awarded an annual equity grant of $155,000 in the form of deferred stock units (Automatic Stock Units).
The Director Program was amended and restated effective January 1, 2016 (the Amended Director Program). Directors received an annual equity grant of Automatic Stock Units on May 17, 2017, which vested on May 17, 2018, and received an annual equity grant of Automatic Stock Units on May 16, 2018 which will vest on May 16, 2019. Under the Amended Director Program, directors may elect to have all or any portion of their Automatic Stock Units paid on (A) the earlier of (i) the beginning of a specified calendar year after the vesting date or (ii) their separation from service as a member of the Board, or (B) the vesting date. Directors may elect to defer to a later year all or a portion of their remaining cash retainer or committee retainer fees into a stock unit account as Elective Stock Units or in alternative investment options. Elective Stock Units are awarded on a calendar quarterly basis. Directors may elect to have all or a portion of their Elective Stock Units paid on the earlier of (i) the beginning of a specified calendar year or (ii) their separation from service as a member of the Board. Stock units awarded under the Amended Director Program will be paid out in an equivalent number of shares of our common stock. Deferral elections are made prior to the beginning of the year for which the retainer fees will be paid. Directors are credited with dividend equivalents in connection with the accumulated stock units until the shares of common stock related to such stock units are issued.
Non-employee directors are eligible to participate in our Matching Gifts Program for Education. Under this program, the Northrop Grumman Foundation matches director contributions, up to $10,000 per year per director, to eligible educational programs in accordance with the program.
Stock Ownership Requirements and Anti-Hedging and Pledging Policy
Non-employee directors are required to own common stock of the Company in an amount equal to five times the annual cash retainer, with such ownership to be achieved within five years of the director's election to the Board. Deferred stock units and Company stock owned outright by the director count towards this requirement.
Company policy prohibits members of the Board of Directors from pledging or engaging in hedging transactions with respect to any of their Company stock, continuing to align the interests of our Board of Directors with those of our shareholders. None of the shares of Company common stock held by our directors are pledged or subject to any hedging transaction.

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 25


COMPENSATION OF DIRECTORS


2018 Director Compensation
The table below provides information on the compensation of our non-employee directors for the year ended December 31, 2018.
Name
 
Fees Earned or Paid in Cash (1)
($)
 
Stock
Awards (2)
($)
 
All Other
Compensation (3)
($)
 
Total
($)
Marianne C. Brown
 
129,400
 
155,000
 
18,825
 
303,225
Victor H. Fazio (4)
 
50,350
 
 
4,621
 
54,971
Donald E. Felsinger
 
160,600
 
155,000
 
36,576
 
352,176
Ann M. Fudge
 
135,600
 
155,000
 
29,379
 
319,979
Bruce S. Gordon
 
128,450
 
155,000
 
39,875
 
323,325
William H. Hernandez
 
155,600
 
155,000
 
10,799
 
321,399
Madeleine A. Kleiner
 
153,700
 
155,000
 
19,475
 
328,175
Karl J. Krapek
 
133,200
 
155,000
 
22,356
 
310,556
Gary Roughead
 
138,000
 
155,000
 
2,279
 
295,279
Thomas M. Schoewe
 
138,000
 
155,000
 
2,994
 
295,994
James S. Turley
 
135,600
 
155,000
 
16,871
 
307,471
Mark A. Welsh III
 
135,600
 
155,000
 
79
 
290,679

(1)
Amounts reflect the annual cash retainer paid to each director, including any applicable annual committee and committee chair retainers and any applicable Lead Independent Director or Chairperson retainer. As described above, a director may elect to defer all or a portion of his or her annual cash retainer into a deferred stock unit account. Amounts deferred as Elective Stock Units or deferred into alternative investment options are reflected in this column.
(2)
Amounts represent the target value of Automatic Stock Units awarded to each of our non-employee directors in 2018 under the 2011 Plan pursuant to the Amended Director Program. The amount reported for each director reflects the aggregate fair value of the Automatic Stock Units on the grant date, as determined under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, Stock Compensation, excluding any assumed forfeitures. The grant date fair value assumes the value of dividend equivalents accrued directly on the awarded units. The aggregate number of Automatic Stock Units and Elective Stock Units held by each director as of December 31, 2018 is provided in the Deferred Stock Units table below.
(3)
Amounts reflect (i) the estimated dollar value of additional stock units credited to each non-employee director as a result of dividend equivalents earned, directly or indirectly, on reinvested dividend equivalents as such amounts are not assumed in the grant date fair value of the Automatic Stock Units shown in the "Stock Awards" column, and (ii) matching contributions made through our Matching Gifts Program for Education discussed above as follows: Ms. Fudge, $10,000; Mr. Gordon, $10,000; Mr. Hernandez, $10,000; Ms. Kleiner, $10,000; and Mr. Krapek, $10,000. Amounts shown also include perquisites and other personal benefits provided to certain of the directors in 2018, including airfare for spouses and certain activities in conjunction with a Company board meeting.
(4)
Mr. Fazio did not stand for reelection at the 2018 Annual Meeting.







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COMPENSATION OF DIRECTORS


Deferred Stock Units
As of December 31, 2018, the non-employee directors had the following aggregate number of deferred stock units accumulated in their deferral accounts for all years of service as a director, including additional stock units credited as a result of dividend equivalents earned on the stock units.
Name
 
Automatic Stock
Units
 
Elective Stock
Units
 
Total
Marianne C. Brown
 
2,774
 
1,571
 
4,345
Victor H. Fazio (1)
 
 
 
Donald E. Felsinger
 
20,470
 
14,890
 
35,360
Ann M. Fudge
 
1,820
 
483
 
2,303
Bruce S. Gordon
 
17,067
 
 
17,067
William H. Hernandez
 
4,400
 
 
4,400
Madeleine A. Kleiner
 
16,065
 
 
16,065
Karl J. Krapek
 
17,110
 
5,291
 
22,401
Gary Roughead
 
7,642
 
 
7,642
Thomas M. Schoewe
 
8,857
 
 
8,857
James S. Turley
 
2,843
 
 
2,843
Mark A. Welsh III
 
1,391
 
 
1,391
 
 
 
 
 
 
 
 
(1) Mr. Fazio did not stand for reelection at the 2018 Annual Meeting. All stock units were paid out to Mr. Fazio in the form of common stock after his retirement from the Board in May 2018.

Director Equity Plan
Under the Northrop Grumman Non-Employee Directors Equity Participation Plan (Director Equity Plan), non-employee directors had an amount equal to 50% of their annual retainer credited to an equity participation account and converted into stock units based on the then fair market value (as defined in the Director Equity Plan) of our common stock. No new participants have been added to the Director Equity Plan since May 31, 2005, and no new annual accruals have been credited to the then-existing participants in the Director Equity Plan since that time. However, directors that served on the Board in and before 2005 continue to be credited with dividend equivalents on the cumulative stock units held in their equity participation accounts until the director terminates service on the Board. Mr. Fazio, who retired from the Board of Directors in May 2018, was the only director who earned dividend equivalents under the Director Equity Plan. No current director participates in the Director Equity Plan.
Generally, if a participating non-employee director terminates service on the Board after completion of at least three consecutive years of service or retires from the Board as a result of a total disability or a debilitating illness as defined in the Director Equity Plan, the participant will be entitled to receive the full balance of the participant's equity participant account in annual installments. Upon a change in control of the Company, as defined in the Director Equity Plan, the participant will immediately be entitled to receive the full balance of the equity participation account under the Director Equity Plan regardless of the number of years of consecutive service, although payment of his or her benefits will not commence until the termination of his or her service.


NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 27


TRANSACTIONS WITH RELATED PERSONS AND CONTROL PERSONS


Related Person Transactions
The Company has a written policy approved by the Board, for the review, approval and ratification of transactions between our Company and our directors, executive officers and other related persons (Related Person Transactions Policy). A copy of the policy is available on the Investor Relations section of our website (www.northropgrumman.com). The policy provides for related person transactions to be reviewed in advance and approved or ratified, as applicable, by the Board of Directors, the Governance Committee or the Chairperson of the Governance Committee. A related person transaction may be approved if, after reviewing the relevant facts and circumstances, the reviewing party concludes that approving the related person transaction is in the best interests of the Company and its shareholders.
The policy defines a related person transaction as any transaction in which the Company was, is or will be a participant, where the amount involved exceeds $120,000, and in which a related person had, has or is expected to have a direct or indirect material interest. A "related person" includes:
any of our directors or executive officers;
any person who is known to be the beneficial owner of more than 5% of our common stock;
an immediate family member of any such persons; or
any firm, corporation, or other entity controlled by any such persons.
The Corporate Secretary may determine that, based on facts and circumstances, a transaction in an amount less than $120,000 should nonetheless be deemed a related person transaction. If this occurs, the transaction would be submitted for review and approval or ratification in accordance with the policy. Under exceptional circumstances, if a related person transaction has not been approved in advance, the Governance Committee will recommend to the Board of Directors such action as the Governance Committee deems appropriate, including ratification, amendment or termination of the transaction.
The policy requires each director and executive officer to complete an annual questionnaire to identify his or her related interests and to notify the Corporate Secretary of any changes in their information.
During 2018, the Company employed one family member of an executive officer who received compensation in excess of the reporting threshold. The spouse of our Corporate Vice President and President, Enterprise Services, Shawn Purvis, was employed by the Company as a Consulting Computer Systems Architect in our Technology Services sector. He received cash compensation (base salary and bonus) of approximately $230,000 and participated in the Company’s benefit plans, commensurate with his position at the Company.
State Street Corporation (State Street), acting in various fiduciary capacities, filed a Schedule 13G/A with the SEC reporting that as of December 31, 2018, State Street and certain of its subsidiaries collectively were the beneficial owners of more than 5% of our outstanding common stock. A subsidiary of State Street is the trustee for various Northrop Grumman defined benefit and defined contribution plan trusts. Two other State Street subsidiaries provide investment management services. During 2018, those State Street subsidiaries received approximately $9.5 million for such services, with over 99% of that amount paid by the plan trusts.
BlackRock, Inc. (BlackRock) filed a Schedule 13G/A with the SEC reporting that as of December 31, 2018, BlackRock and certain of its subsidiaries collectively were the beneficial owners of more than 5% of our outstanding common stock. A subsidiary of BlackRock provides investment management services for the Northrop Grumman Rabbi Trust II and certain assets within various Northrop Grumman defined benefit and defined contribution plan trusts. During 2018, the trusts paid that BlackRock subsidiary approximately $3.2 million for such services.
At the request of our Chief Executive Officer and as authorized by the Board of Directors, Wesley G. Bush has agreed to provide limited consulting service to the Company after his retirement as our Chairman in July 2019, for an initial period of five years. Consulting fees are not expected to exceed $200,000 per year.
    
Compensation Committee Interlocks and Insider Participation
During 2018, Ms. Brown and Messrs. Felsinger, Gordon, Krapek, Roughead and Schoewe served as members of the Compensation Committee. During 2018, no member of the Compensation Committee had a relationship with the Company or any of our subsidiaries, other than as directors and shareholders, and no member was an officer or employee of the Company or any of our subsidiaries, a participant in a related person transaction or an executive officer of another entity, where one of our executive officers serves on the board of directors that would constitute a related person transaction or raise concerns of a Compensation Committee interlock.

28 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


TRANSACTIONS WITH RELATED PERSONS AND CONTROL PERSONS


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

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 29


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE


Section 16(a) of the Securities Exchange Act of 1934, as amended (Exchange Act), requires our directors and executive officers, and persons who own more than ten percent of our common stock, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC.
Based on our review of Forms 3, 4 and 5 we have received or have filed on behalf of our executive officers and directors, and written representations from those persons that they were not required to file a Form 5, we believe that all required filings were made on a timely basis during the year ended December 31, 2018, other than a delayed filing of one day for each of Mr. Pamiljans and Ms. Purvis and a delayed filing for Ms. Kalan relating to the sale of shares indirectly held through family members.

30 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


VOTING SECURITIES AND PRINCIPAL HOLDERS


Stock Ownership of Certain Beneficial Owners
The following entities beneficially owned, to the best of our knowledge, more than five percent of the outstanding common stock as of December 31, 2018. All information shown is based on information reported by the filer on a Schedule 13G filed with the SEC on the dates indicated in the footnotes below.
Name and Address of Beneficial Owner
 
Amount and Nature of
Beneficial Ownership of
Common Stock
 
Percent
of  Class
State Street Corporation
One Lincoln Street, Boston, MA 02111
 
17,679,908
(1)
 
10.2%
The Vanguard Group
100 Vanguard Blvd., Malvern, PA 19355
 
13,976,016
(2)
 
8.0%
BlackRock, Inc.
55 East 52nd Street, New York, NY 10055
 
11,613,939
(3)
 
6.7%
T. Rowe Price Associates, Inc.
100 E. Pratt Street, Baltimore, MD 21202
 
11,458,250
(4)
 
6.6%
Capital International Investors
11100 Santa Monica Boulevard, 16th Floor,
Los Angeles, CA 90025
 
10,452,149
(5)
 
6.0%

(1)
This information was provided by State Street Corporation (State Street) in a Schedule 13G filed with the SEC on February 13, 2019. According to State Street, as of December 31, 2018, State Street had shared voting power over 17,171,242 shares and shared dispositive power over 17,678,111 shares. This total includes 11,130,319 shares held as of December 31, 2018 in the Defined Contribution Plans Master Trust for the Northrop Grumman Savings Plan and the Northrop Grumman Financial Security and Savings Program, for which State Street Bank and Trust Company acts as trustee and State Street Global Advisors Trust Company acts as investment manager.
(2)
This information was provided by The Vanguard Group (Vanguard) in a Schedule 13G/A filed with the SEC on February 11, 2019. According to Vanguard, as of December 31, 2018, Vanguard had sole voting power over 204,053 shares, shared voting power over 19,712 shares, sole dispositive power over 13,752,660 shares and shared dispositive power over 223,356 shares.
(3)
This information was provided by BlackRock, Inc. (BlackRock) in a Schedule 13G/A filed with the SEC on February 6, 2019. According to BlackRock, as of December 31, 2018, BlackRock had sole voting power over 10,581,017 shares and sole dispositive power over 11,613,939 shares.
(4)
This information was provided by T. Rowe Price Associates, Inc. (T. Rowe Price) in a Schedule 13G filed with the SEC on February 14, 2019. According to T. Rowe Price, as of December 31, 2018, T. Rowe Price had sole voting power over 4,534,110 shares and sole dispositive power over 11,449,975 shares.
(5)
This information was provided by Capital International Investors (Capital International), a division of Capital Research and Management Company, in a Schedule 13G filed with the SEC on February 14, 2019. According to Capital International, as of December 31, 2018, Capital International had sole voting power over 10,347,176 shares and sole dispositive power over 10,452,149 shares.
  

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 31


VOTING SECURITIES AND PRINCIPAL HOLDERS


Stock Ownership of Officers and Directors
The following table shows beneficial ownership of our common stock as of March 19, 2019 by each of our current directors, our named executive officers and all directors and executive officers as a group. As of March 19, 2019, there were 169,959,030 shares of our common stock outstanding. None of the persons named below beneficially owns in excess of 1% of our outstanding common stock. Unless otherwise indicated, each individual has sole investment power and sole voting power with respect to the shares owned by such person.
 
 
Shares of Common  Stock
Beneficially Owned
 
 
Share
Equivalents (1)
 
Total
 
Non-Employee Directors
 
 
 
 
 
 
 
 
Marianne C. Brown
 
 
 
4,364
 
4,364
 
Donald E. Felsinger
 
 
 
35,508
 
35,508
 
Ann M. Fudge
 
93
 
 
2,312
 
2,405
 
Bruce S. Gordon
 
  
 
17,138
 
17,138
 
William H. Hernandez
 
1,000
 
 
4,418
 
5,418
 
Madeleine A. Kleiner
 
971
  
 
16,132
 
17,103
 
Karl J. Krapek
 
4,856
  
 
21,614
 
26,470
 
Gary Roughead
 
  
 
7,674
 
7,674
 
Thomas M. Schoewe
 
3,160
  
 
8,894
 
12,054
 
James S. Turley
 
 
 
2,855
 
2,855
 
Mark A. Welsh III
 
 
 
1,397
 
1,397
 
Named Executive Officers
 
 
 
 
 
 
 
 
Wesley G. Bush (2)
 
296,286
(3)
 
5,661
 
301,947
 
Kathy J. Warden (4)
 
99,732
 
 
 
99,732
 
Kenneth L. Bedingfield
 
40,005
 
 
 
40,005
 
Mark A. Caylor
 
15,879
 
 
35
 
15,914
 
Blake L. Larson
 
3,596
 
 
 
3,596
 
Other Executive Officers
 
159,537
  
 
15,788
 
175,325
 
All Directors and Executive Officers as a Group (27 persons)
 
625,115
  
 
143,790
 
768,905
(5)

(1)
Share equivalents for directors represent non-voting deferred stock units acquired under the 2011 Plan, some of which are paid out in shares of common stock at the conclusion of a director-specified deferral period, and others are paid out upon termination of the director's service on the Board. Certain of the NEOs hold share equivalents with pass-through voting rights in the Northrop Grumman Savings Plan or the Northrop Grumman Financial Security and Savings Program.
(2)
On January 1, 2019, Wesley G. Bush was succeeded as Chief Executive Officer by Kathy J. Warden. Mr. Bush will remain an employee of the Company and continue to serve as Chairman of the Board until his retirement on July 31, 2019.
(3)
Includes 207,161 shares held in the W.G. and N.F. Bush Family Trust, 20,036 shares held in the Bush Trust Number 4 Trust, and 19,089 shares held in the Wesley G. Bush Revocable Trust, each of which Mr. Bush and his wife serve as trustees.
(4)
Ms. Warden also serves on the Company's Board of Directors.
(5)
Total represents 0.45% of the outstanding common stock as of March 19, 2019. 

32 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


EQUITY COMPENSATION PLAN INFORMATION


We currently maintain two equity compensation plans: the 2011 Plan and the 1993 Stock Plan for Non-Employee Directors, as amended (1993 Directors Plan). Each of these plans has been approved by our shareholders.
The following table sets forth the number of shares of our common stock to be issued upon payout of outstanding awards and the number of shares remaining available for future award grants under these equity compensation plans as of December 31, 2018.
Plan category
 
Number of shares  of
common stock to be
issued upon exercise
of outstanding options and
payout of outstanding
awards (1)
(#)
 
Weighted-average
exercise price of
outstanding options (2)
($)
 
Number of shares of 
common stock remaining available for future issuance under equity compensation plans (excluding shares reflected in the first column) (3)
(#)
 
Equity compensation plans approved by shareholders
 
1,723,560
 
N/A
 
5,927,560
  
Equity compensation plans not approved by shareholders
 
N/A
 
N/A
 
N/A
  
Total
 
1,723,560
 
N/A
 
5,927,560
(4)

(1)
This number includes 796,354 shares that were subject to outstanding stock awards granted under the 2011 Plan, 463,648 awards earned at year end but pending distribution subject to final performance adjustments, 122,674 shares subject to outstanding stock unit credited under the 2011 Plan and 1993 Directors Plan, and additional performance shares of 340,884, which reflect the number of shares deliverable under payment of outstanding restricted performance stock rights, assuming maximum performance criteria have been achieved.
(2)
There were no options outstanding as of December 31, 2018.
(3)
Of the aggregate number of shares that remained available for future issuance, 5,927,560 were available under the 2011 Plan as of December 31, 2018. No new awards may be granted under the 1993 Directors Plan.
(4)
After giving effect to our February 2019 awards, the number of shares of common stock remaining available for future issuance would be 5,412,262 (assuming maximum payout of such awards).


NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 33


PROPOSAL TWO: ADVISORY VOTE ON COMPENSATION OF NAMED EXECUTIVE OFFICERS

Consistent with Section 14A of the Exchange Act, we are providing our shareholders with the opportunity to cast a non-binding, advisory vote on the compensation of our NEOs. This advisory vote, commonly known as "say-on-pay," gives our shareholders the opportunity to express their view on our 2018 executive compensation programs and policies for our NEOs. The vote does not address any specific item of compensation and is not binding on the Board; however, as an expression of our shareholders' views, the Compensation Committee seriously considers the vote when making future executive compensation decisions. The Board has adopted a policy of providing for annual advisory votes on the compensation of our NEOs.
We believe our compensation programs reflect responsible, measured practices that effectively incentivize our executives to dedicate themselves fully to value creation for our shareholders, customers and employees. Our pay practices are aligned with our shareholders' interests and with leading industry practice and are governed by a set of strong policies. Examples include:
Double-trigger provisions for change in control situations, and no excise tax gross-ups for payments upon termination after a change in control;
A recoupment policy applicable to cash and equity incentive compensation payments;
Stock ownership guidelines of 7x base salary for the CEO and 3x base salary for other NEOs, and stock holding requirements of three years from the vesting date for equity awards; and
Prohibitions on hedging or pledging of Company stock.
For a more extensive list of our best practices, refer to page 37 of this Proxy Statement. In addition, our Compensation Discussion and Analysis (CD&A) provides a detailed discussion of our performance-based approach to executive compensation. We encourage you to read the CD&A, the rest of this Proxy Statement and our 2018 Form 10-K, which describes our business and 2018 results in more detail.
Recommendation
The compensation of our executives is aligned to performance, is sensitive to shareholder returns, appropriately motivates and retains our executives, and is a competitive advantage in attracting and retaining the high caliber talent necessary to drive our business forward and build sustainable value for our shareholders. Accordingly, the Board recommends that shareholders approve the following resolution:
"RESOLVED, that, as an advisory matter, the shareholders of Northrop Grumman Corporation approve the compensation paid to the Company's named executive officers as disclosed in this Proxy Statement pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion."
Vote Required
Approval of this proposal requires that the votes cast "for" the proposal exceed the votes cast "against" the proposal. Abstentions and broker non-votes will have no effect on this proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL TWO.
 

34 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS


Compensation Discussion and Analysis
In this CD&A, we provide an overview of our executive compensation programs and the underlying philosophy used to develop the programs. We describe the material components of our executive compensation programs for our 2018 NEOs and explain how and why our Board's Compensation Committee arrived at certain specific compensation policies and decisions. We refer to certain non-GAAP (accounting principles generally accepted in the United States of America) financial measures, which are identified with asterisks. For more information, including definitions, reconciliations to the most directly comparable GAAP measure and why we believe these measures may be useful to investors, see "Appendix A - Use of Non-GAAP Financial Measures." The 2018 NEO compensation is provided in the Summary Compensation Table on page 53 and other compensation tables contained in this Proxy Statement.
2018 NEOs
WESLEY G. BUSH
KATHY J. WARDEN
KENNETH L. BEDINGFIELD
MARK A. CAYLOR
BLAKE E. LARSON (1) 
(1) Mr. Larson was elected Corporate Vice President and President, Innovation Systems (President, Innovation Systems) effective as of June 6, 2018 (the "Merger Date"). The "Compensation Tables" of this CD&A include compensation Mr. Larson earned relative to his service as an elected officer of Northrop Grumman (i.e., from the Merger Date - December 31, 2018), except as otherwise discussed in the CD&A.

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 35


COMPENSATION DISCUSSION AND ANALYSIS


CEO Transition
The Company executed a smooth transition in executive leadership, announcing in July 2018 that Kathy Warden would become our Chief Executive Officer on January 1, 2019. Ms. Warden joined Northrop Grumman in 2008, and has been in operating roles of increasing responsibility, spanning much of our technology portfolio and customer base. Ms. Warden led the Company’s cybersecurity business and the former Information Systems sector. She also led the integration of two sectors to stand up a new operating model for our Mission Systems sector, and is leading the integration of the legacy Orbital ATK business. Most recently, she was appointed Chief Operating Officer in January 2018, and the Board elected Ms. Warden to the Board of Directors on July 12, 2018. To reflect the strength of leadership already demonstrated by Ms. Warden and the Board’s confidence in the succession transition and future performance, the Board of Directors approved for Ms. Warden a one-time promotion long-term incentive grant of $5,000,000. The grant is comprised of 70% Restricted Performance Stock Rights (RPSRs) for the 2018-2020 performance period and 30% Restricted Stock Rights (RSRs).
Wesley Bush will continue to serve as Chairman until his retirement on July 31, 2019. Mr. Bush has presided as CEO since January 2010, through numerous business restructuring and business divestitures which have grown shareholder value and strategically positioned the Company for future growth and success. The Board of Directors approved continued vesting of the two long-term incentive grants, previously awarded to Mr. Bush in 2017 and 2018, and as a result, these grants will continue to vest through the applicable performance and vesting periods. These grants will have the same holding requirements as described on page 50 and the modifications extend post-employment covenants, including non-competition and non-solicitation of customers and employees, to July 31, 2022.
At the request of Ms. Warden and as authorized by the Board of Directors, Mr. Bush has agreed to provide limited consulting service to the Company after July 2019, for an initial period of five years. Consulting fees are not expected to exceed $200,000 per year.
All references to CEO compensation in this CD&A reflect Mr. Bush's compensation in connection with his service as CEO during all of 2018.
New Sector Leadership
On June 6, 2018, Northrop Grumman completed a strategic acquisition of Orbital ATK to expand capabilities and accelerate innovation in critical global security domains. The legacy Orbital ATK business became a wholly-owned subsidiary of the Company and its name was changed to Northrop Grumman Innovation Systems, Inc., which we established as a new, fourth business sector (Innovation Systems). We elected Blake Larson, previously the Chief Operating Officer of Orbital ATK, as the President of the new operating sector.
Pursuant to the Agreement and Plan of Merger dated September 17, 2017 (the "Merger Agreement"), the majority of the value of Mr. Larson's 2018 legacy Orbital ATK long-term grants was forfeited. In recognition of Mr. Larson’s proven leadership and his election as an officer of the Company, the Board approved a new, long-term incentive grant of $3,000,000 for the 2018-2020 performance period, comprised of 70% RPSRs and 30% RSRs.
Former executives of the legacy Orbital ATK company participated in change-in-control plans, the Income Security Plans (ISPs). Upon joining Northrop Grumman, Mr. Larson agreed to waive any rights to further compensation and benefits under the ISPs and the Merger Agreement retention grant. In recognition of this forfeited value, the Company provided Mr. Larson a one-time RSR award of $3,500,000. The terms of this award are reported in the Grants of Plan-Based Awards Table on page 55.


36 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY


Summary of Our Executive Compensation Programs
Our executive compensation philosophy is to provide a complementary set of compensation programs to our NEOs with attractive, flexible and market-based total compensation tied to annual and long-term performance and aligned with the interests of our shareholders. The key elements of our compensation programs for our NEOs are summarized below.
 
 
Compensation Element
 
Purpose
 
Key Characteristics
 
 
 
 
 
 
 
Fixed Component
 
Base Salary
 
Compensate fairly and competitively
 
Determined by level of responsibility, competitive market pay assessment and individual performance
 
 
 
 
 
 
 
Long-Term Incentive Plan (LTIP) RSRs
 
Link the interests of our executive officers to shareholders and retain executive talent
 
30% of annual LTIP grant
Three-year cliff vesting
 
 
 
 
 
 
 
Performance-based Component
 
Annual Incentive Plan (AIP)
 
Motivate and reward achievement of annual business objectives
 
Financial Metrics
1/3 Pension-adjusted Operating Margin (OM) Rate*
1/3 Pension-adjusted Cash Flow from Operations*
1/3 Pension-adjusted Net Income* Growth

Subject to downward adjustment for failure to achieve non-financial objectives
 
 
 
 
 
 
 
LTIP RPSRs
 
Link the interests of our executive officers to shareholders, motivate and reward achievement of long-term strategic goals and retain executive talent
 
70% of annual LTIP grant
Three-year performance period
Actual shares earned are weighted 50% to relative TSR and 50% to Cumulative Free Cash Flow* (Cumulative FCF*)
* This metric is a non-GAAP financial measure. For more information, see "Appendix A - Use of Non-GAAP Financial Measures."
Our Compensation Pay Practices (pages 40 - 51)
Our compensation programs incorporate best practices, including the following:
Best Practices
 
 
 
 
 
 Pay for Performance
 Above Target and Maximum Annual Incentive Payouts Only When We Outperform Our Peer Benchmarks
 Long-Term Incentives Focused on Performance
  Cap on Annual Bonuses and Performance-Based Long-Term Incentive Share Payouts
   Compensation Elements Benchmarked at Market Median
 
  Annual Peer Group Review
Independent Consultant Reports Directly to Compensation Committee
 Double Trigger Provisions for Change in Control
    No Individual Change in Control Agreements
   No Excise Tax Gross-ups for Payments Received Upon Termination After a Change in Control
 
No Hedging or Pledging of Company Stock
Dividends Paid Upon Vesting
Recoupment Policy on Incentive Compensation Payments
 Stock Ownership Guidelines and Stock Holding Requirements
 Regular Risk Assessments Performed
No Employment Contracts for CEO or other NEOs

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 37


COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY



2018 Performance Highlights
We continued to generate strong financial results in 2018, including higher sales, operating income, segment operating income*, net earnings, cash from operations and free cash flow*. 2018 mark-to-market (MTM)-adjusted diluted earnings per share* increased to $21.33. Our strong cash generation allowed us to invest $1.25 billion in our business and return approximately $2.1 billion to our shareholders through share repurchases and dividends.
Earnings Per Share
chart-7f843f46f40eb8aae44.jpg
* This metric is a non-GAAP financial measure. For more information, see "Appendix A - Use of Non-GAAP Financial Measures."
Total Shareholder Return (1) (3-Year Average)
chart-3bd1f3c58e4d4075111.jpg
(1) The TSR calculation is based on a 30 calendar day average from the start of the performance period through the end of the performance period.

38 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY


Management and the Compensation Committee believe our executive compensation programs are competitive and support achieving strong financial performance while investing for profitable growth and value creation over the long-term. A 97% shareholder majority approved last year's say-on-pay proposal, and our ongoing shareholder engagement indicates continued support for the structure and elements of our executive incentive compensation programs.
Compensation Mix and Incentive Metrics
We have a balanced pay for performance compensation structure that places an appropriate level of compensation at risk, based on our financial and non-financial performance measures and relative TSR. The following charts show performance-based compensation elements at target values.

compensationmix.jpg
(1) The chart above excludes the sign-on RSR award granted to Mr. Larson, as it was a one-time compensation event.
For AIP, following are the results for 2018 performance, which have been adjusted to exclude the impacts of the addition of Innovation Systems, certain Orbital ATK transaction-related expenses and certain impacts related to the Company's 2018 adoption of the MTM method of accounting for its pension and other postretirement benefit (OPB) plans as detailed in "Appendix A - Use of Non-GAAP Financial Measures":
Pension-adjusted OM Rate*: 11.4%
Pension-adjusted Cash Flow from Operations*: $3.2B
Pension-adjusted Net Income* Growth: $2.4B
For the LTIP, our score covering the three-year 2016-2018 performance period was weighted 70% to relative TSR and 30% to Cumulative FCF*, maintaining strong alignment to shareholder interest and increased emphasis on operational performance. The combined weighted score for the metrics generated an overall performance score of 115%.

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 39


COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES


Compensation Philosophy and Objectives
We provide an attractive, flexible and market-based total compensation program tied to performance and aligned with the interests of our shareholders. Our objective is to recruit and retain the caliber of executives and other key employees capable of achieving top performance and generating value for our shareholders, customers and employees.
Our goal is to lead our industry in sustainable performance, while maintaining strong, enduring values. The targets and thresholds of our AIP are based on the performance of our peers and the market. Our 2018 LTIP metrics are based on (1) TSR relative to our Performance Peer Group and the S&P Industrials and (2) Cumulative FCF*. For each plan, we selected metrics that drive shareholder value and benchmark our performance against our peers and the market. Our executive compensation and benefit programs are guided by the following principles:
Pay for Performance
      Our incentive plans are based on peer and market benchmarked performance metrics.
 
Leadership Retention and Succession
      Compensation is designed to be competitive within our industry and retain top talent.
      Programs are designed to motivate and reward NEOs for delivering operational and strategic performance over time.
 
Sustainable Performance
      Our AIP includes both financial and non-financial metrics to ensure we are building a strong foundation for long-term sustainable performance and shareholder value creation.
 
Alignment with Shareholder Interests
      Our compensation structure places an appropriate amount of compensation at risk based on annual and long-term results.
      At-risk compensation is based on financial and non-financial performance measures and relative TSR.
      A significant portion of compensation is delivered in equity, the vesting and value of which provides alignment with shareholder returns.
      Stock ownership guidelines, holding requirements for equity awards and our recoupment policy further align executive and shareholder interests.
 
Benchmarking
      Compensation program provisions and financial objectives are evaluated on an annual basis and modified in accordance with industry and business conditions.
      We seek to outperform our peers (a group of top global defense companies identified as the Performance Peer Group on page 42).
      We use a Target Industry Peer Group (identified on page 43) for broader market executive compensation analyses that includes companies based on a peer-of-peers analysis.
 
Compensation Risk Management
      The Compensation Committee, together with its independent compensation consultant, conducts an annual assessment of the compensation programs to determine if there are potential material risks to the Company.
      Both the Compensation Committee and its independent compensation consultant evaluate the mix of at-risk compensation linked to stock appreciation.
     The assessment is to confirm there is an appropriate balance in the executive compensation programs, practices and policies.

40 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES


How We Make Compensation Decisions
Role of the Compensation Committee
The Compensation Committee is responsible for overseeing our compensation policies, incentive and equity compensation plans and approving payments or grants under these plans for elected officers (other than the CEO). The Compensation Committee recommends the compensation for our CEO to the independent directors of the Board for approval and approves the compensation for the other NEOs. In performing its duties, the Compensation Committee:
receives advice from an independent compensation consultant who reports directly to the Compensation Committee and is discussed further below;
reviews market data and other input from its independent compensation consultant;
reviews and approves incentive goals and objectives (CEO goals and objectives are reviewed and approved by the independent directors);
evaluates and approves executive benefit and perquisite programs; and
evaluates the competitiveness of each elected officer's total compensation package.
In addition, the Compensation Committee annually reviews and discusses with management the CD&A and provides a Compensation Committee Report for inclusion in the proxy statement.
For more information regarding the composition of the Compensation Committee and its duties and responsibilities, see "Corporate Governance – Committees of the Board of Directors – Compensation Committee."
Role of the Independent Compensation Consultant
The Compensation Committee retains an independent compensation consultant, Frederic W. Cook & Co. (the Compensation Consultant). The Compensation Consultant reports directly to the Compensation Committee, and the Compensation Committee may replace the Compensation Consultant or hire additional consultants at any time. A representative of the Compensation Consultant regularly participates in meetings of the Compensation Committee and communicates with the Compensation Committee Chairperson between meetings as needed; however, the Compensation Committee and the independent directors of the Board make final decisions on the compensation actions for the NEOs. The Compensation Consultant also participates in executive session with the Compensation Committee. Other than the fees paid to the Compensation Consultant pursuant to its engagement by the Compensation Committee for its advice on executive and director compensation, the Compensation Consultant does not receive any fees or income from the Company.
The Compensation Consultant provides an independent review of market data and advises the Compensation Committee on the levels and structure of our executive compensation policies and procedures, including compensation matters for NEOs. The Compensation Consultant utilizes aerospace and defense industry market data and conducts an independent review of publicly available data.
The roles of the Compensation Consultant include:
reviewing and advising the Compensation Committee on our total compensation philosophy, peer groups and target competitive positioning;
identifying market trends and practices and advising the Compensation Committee on program design implications;
providing proactive advice to the Compensation Committee on best practices for Board governance of executive compensation, compensation-related risk management, and any areas for program design to most appropriately support the Company's business strategy and organizational values; and
serving as a resource to the Compensation Committee Chairperson on setting agenda items for Compensation Committee meetings and undertaking special projects.
In February 2019, the Compensation Committee determined that there were no relationships between the Compensation Consultant and the Company or any of the Company's directors or executive officers that raised a conflict of interest.
Role of Management
Our CEO makes compensation-related recommendations for elected officers to the Compensation Committee for its review and approval. The CEO's evaluation is based on each officer's compensation relative to market and the overall framework, philosophy and objectives for our executive compensation programs set by the Compensation Committee.

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 41


COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES


The recommendations for elected officers are based on an assessment of each executive's performance, skills and industry knowledge, market compensation benchmarks, and succession and retention considerations. The Chief Human Resources Officer provides a summary of historical compensation and benefits-related data when compensation decisions are considered by the Compensation Committee to ensure compensation decisions are made within our total compensation framework.
Management also provides recommendations to the Compensation Committee regarding executive incentive and benefit plan designs and strategies. These recommendations include financial and non-financial operational goals and criteria for our annual and long-term incentive plans.
Use of Competitive Data
Performance Peer Group: Set Performance Targets and Evaluate Performance
The Compensation Committee uses the Performance Peer Group for purposes of setting performance targets and evaluating performance for our AIP and LTIP. The Performance Peer Group is comprised of the largest global defense companies by government revenues within the aerospace and defense market space. AIP goals for 2018 and goals for the LTIP grants made during 2018 that will vest in 2020 were established based on the 2018 Performance Peer Group.
2018 PERFORMANCE PEER GROUP
BAE Systems
Harris Corporation
Lockheed Martin Corporation
The Boeing Company
L3 Technologies, Inc.
Raytheon Company
Booz Allen Hamilton Holding Corporation
Leidos Holdings, Inc.
Thales Group
General Dynamics Corporation
Leonardo
 
Performance targets for the LTIP grants for the three-year performance period vesting in 2018 were established in 2016, based on the 2016 Performance Peer Group.
2016 PERFORMANCE PEER GROUP
BAE Systems
Harris Corporation
Lockheed Martin Corporation
The Boeing Company
L3 Technologies, Inc.
Raytheon Company
Booz Allen Hamilton Holding Corporation
Leidos Holdings, Inc.
Thales Group
General Dynamics Corporation
Leonardo
 
Target Industry Peer Group: Benchmark Executive Compensation Practices
The Compensation Committee benchmarks our executive compensation levels and practices against a Target Industry Peer Group of 14 companies, as well as against a subset of the Target Industry Peer Group containing six direct peers. Prior to the beginning of the year, the Compensation Committee sets the Target Industry Peer Group and the subset of direct peers used to benchmark compensation for the following year. To identify peer companies for compensation benchmarking purposes, the Compensation Consultant employed an objective criteria-based methodology where:
the company was identified as a peer by at least two aerospace and defense peers or proxy advisory services;
the company participated in the annual Aon Hewitt executive compensation study; and
revenues, total employees and market capitalization of the company were broadly similar to those of the Company.

42 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES


While the Target Industry Peer Group is reviewed annually by the Compensation Committee with the Compensation Consultant, our goal is to keep it as consistent as reasonably possible on a year-over-year basis. The companies that comprise the 2018 Target Industry Peer Group are listed in the following table:
2018 TARGET INDUSTRY PEER GROUP
3M Company
Johnson Controls International
The Boeing Company (1)
L3 Technologies, Inc. (1)
Caterpillar, Inc.
Lockheed Martin Corporation (1)
Eaton Corporation
Raytheon Company (1)
Emerson Electric Company
Rockwell Collins, Inc.
General Dynamics Corporation (1)
Textron, Inc.
Honeywell International, Inc. (1)
United Technologies Corporation
(1) Included in the subset of six direct peers also used for compensation benchmarking
It is the Company's pay philosophy to provide the CEO a compensation package that comprises competitive elements of base salary and target variable pay relative to the Target Industry Peer Group. In 2018, the CEO's target total direct compensation approximated the median of the Target Industry Peer Group.
Another element of the Company's pay philosophy is to tie a significant portion of the CEO's pay to performance. As a result, the CEO's actual compensation may differ from this market median based on the Company's actual performance.
In determining the base salary and target variable pay elements for the other NEOs, the Compensation Committee does not set any specific benchmark relative to the Target Industry Peer Group; rather, the Compensation Committee considers several factors in determining their compensation, including executive compensation levels and practices of the Target Industry Peer Group, NEO individual experience, growth in job as demonstrated through sustained performance, leadership impact, retention and pay relative to the CEO. Actual annual incentive awards and long-term incentive award opportunities reflect these factors, as well as Company performance.


NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 43


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


Annual Incentive Compensation
Under our shareholder-approved 2002 Incentive Compensation Plan (the Plan), the Compensation Committee approves the annual incentive compensation target payout percentage for each NEO other than the CEO. For the CEO, such percentage is approved by the independent directors of the Board.
The target incentive award (target bonus) represents a percentage of each NEO's base salary. Following the completion of the fiscal year, the target bonus is used by the Compensation Committee, together with its assessment of Company performance against pre-determined performance criteria, to determine the final bonus award amount.
2018 Annual Incentive
The 2018 target bonus for the CEO was 180% of base salary, which was unchanged from 2017. The 2018 target bonus for the COO was 120% of base salary and 100% of base salary for the CFO and other NEOs, including Mr. Larson, as the new Innovation Systems sector president. Mr. Larson’s final bonus award reflects the time he served in his role as an elected officer of Orbital ATK and of Northrop Grumman.
Final bonus awards for each NEO were determined by multiplying the Northrop Grumman Company Performance Factor (CPF) by the target bonus. The CPF can range from 0% to 200%.
Annual Incentive Formula for 2018 (1):

Base Salary

X

Target Payout %

=

Target Bonus

 
 
 
 
 

Target Bonus

X

CPF

=

Final Bonus Award

(1) The final bonus award for Mr. Larson was determined utilizing previously established 2018 annual incentive performance goals under the legacy Orbital ATK Executive Officer Incentive Plan (EOIP), discussed in greater detail on page 46.
Annual performance evaluations are conducted by the CEO for each NEO, other than the CEO, and reviewed with the Compensation Committee. The Compensation Committee considers this performance information as well as the comparison to market data.
The Compensation Committee approves bonus amounts for all NEOs except the CEO, whose annual bonus is recommended by the Compensation Committee to the independent members of the Board for approval. The Compensation Committee has discretion to make adjustments to the annual bonus payouts for NEOs, except the CEO, if it determines such adjustment is warranted. For example, in instances where Company performance has been impacted by unforeseen or unusual events, the Compensation Committee has exercised its authority to increase the final awards as necessary to preserve the intended incentives and benefits. The Compensation Committee has also adjusted payouts downward in the past, despite performance targets having been met, when it determined that particular circumstances had a negative impact on the Company but were not reflected in the performance calculation.

44 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


2018 Annual Incentive Goals and Results
For the AIP, we use a mix of financial and non-financial metrics to measure our performance. Our AIP metrics reflect our commitment to investing for and achieving long-term profitable growth; maintaining alignment with shareholders' interests; and incentivizing top performance against our industry peers. For 2018, the Compensation Committee again selected Pension-adjusted OM Rate* and Pension-adjusted Net Income* Growth and refined the cash performance metric to Pension-adjusted Cash Flow from Operations* from the previous metric of Pension-adjusted Cash Flow from Operations Conversion*. The financial metrics are each weighted at 1/3 and are defined as follows:
Pension-adjusted OM Rate*: establishes high program performance expectations for the Company and is calculated as OM rate (operating margin divided by sales) before net FAS (service)/CAS pension adjustment (the difference between pension expense charged to contracts and included as cost in segment operating income* in accordance with U.S. Government Cost Accounting Standards (CAS) and the service component of pension expense determined in accordance with GAAP (FAS)).
Pension-adjusted Cash Flow from Operations*: recognizes the importance of converting net income into cash. The metric is calculated as cash provided by operating activities before the after-tax impact of discretionary pension contributions*. Pension-adjusted Cash Flow from Operations* enables management to make capital investment decisions that support long-term profitable growth without impacting performance-based incentive compensation.
Pension-adjusted Net Income* Growth: incentivizes management to achieve relative long-term profitable growth greater than a projected industry growth rate. Pension-adjusted Net Income* Growth is calculated as net income before the after-tax impact of the total net FAS/CAS pension adjustment.
In addition to these financial goals, we established non-financial goals to align our objectives with all our stakeholders. Performance against non-financial metrics can result only in a downward adjustment to the financial metric score. For 2018, we selected the following non-financial metrics:
Customer Satisfaction: measured in terms of customer feedback, including customer-generated performance scores, award fees and verbal and written feedback.
Diversity: measured in terms of improving representation of females and people of color in all management level positions with respect to internal and external benchmarks.
Engagement & Inclusion: measured based on performance at or above the global high performing norm for engagement and inclusion indices and an accountability metric (as reported in a company-wide employee survey).
Environmental Sustainability: measured in terms of reductions in absolute greenhouse gas emissions and potable water use consumption, and improvement in solid waste diversion (i.e., waste diverted from landfill disposal).
Quality: measured using program-specific objectives, including defect rates, process quality, supplier quality, planning quality or other appropriate criteria for program type and phase.
Safety: measured by total case rate, defined as the number of Occupational Safety & Health Administration recordable injuries as well as by lost work day rate associated with those injuries.
Our AIP provides for payout levels from 0% to 200% of target. The minimum, target and maximum performance levels are derived based on an analysis of the past performance of our Performance Peer Group (Pension-adjusted Net Income* Growth is based on projected market growth rates). Specific values are identified for each metric at selected points in the range between minimum and maximum and other values are determined by linear interpolation between these points. No payout is made if performance is below the minimum. Above target payout can be earned only if the Company’s performance exceeds the performance threshold noted in the table below. The maximum 200% payout is based upon top quartile past performance of the Performance Peer Group. This structure rewards superior performance by aligning above-target payouts to outperforming our peer benchmarks and provides reduced awards for below target performance.

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 45


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


In determining the Company Performance Factor, both financial and non-financial performance against goals is assessed. The Company financial performance for the three metrics shown in the table below was 166%. As approved by the Compensation Committee, Company performance calculations exclude the impacts of the addition of Innovation Systems, certain Orbital ATK transaction-related expenses and certain impacts related to the Company's 2018 adoption of the MTM method of accounting for its pension and OPB plans as detailed in "Appendix A - Use of Non-GAAP Financial Measures".
Metric/Goal
Weighting
Performance to Achieve Target Payout
2018 Performance
2018 Financial Score
Pension-adjusted OM Rate*
1/3
9.9%
11.4%
67%
Pension-adjusted Cash Flow from Operations*
1/3
$3.4B
$3.2B
32%
Pension-adjusted Net Income* Growth
1/3
$1.9B
$2.4B
67%
 

 
 
166%
* This metric is a non-GAAP financial measure. For more information, see "Appendix A - Use of Non-GAAP Financial Measures."
Performance against the annual non-financial metrics cannot exceed 100% and can result only in a downward adjustment to the financial performance score. The Company demonstrated strong performance in 2018 overall against the non-financial goals, and the Compensation Committee approved a non-financial score of 96.5%. In consideration of both the financial and non-financial performance, the 2018 Company Performance Factor was determined to be 160%.
Consistent with Mr. Larson’s continued leadership of the legacy Orbital ATK business in the newly established Innovation Systems sector, Mr. Larson’s 2018 final bonus award was determined based on the pre-established annual incentive goals under the Executive Officer Incentive Plan, 75% based on financial metrics and 25% based on operational objectives. For Mr. Larson, the Compensation Committee approved a performance range of 0%-200%. For 2018, the Orbital ATK financial metrics and targets consisted of Earnings before Interest and Taxes (EBIT) ($540M), Revenue ($4.8B), Free Cash Flow ($226M), equally weighted at 30% and Orders ($4.7B) weighted at 10%. The 2018 operational objectives were aimed at improving company processes and business systems, achieving certain cost reductions, and providing strong support to business group initiatives. The Compensation Committee assessed the 2018 performance and approved a score of 160%. In 2019, Mr. Larson will participate in the same AIP applicable to Northrop Grumman elected officers.
Decisions for 2018
In February 2019, the Compensation Committee recommended, and the independent members of our Board approved, a 2018 annual incentive award of $4,562,000 for Mr. Bush and a 2018 annual incentive award of $1,920,000 for Ms. Warden. As CEO, Ms. Warden recommended, and the Compensation Committee approved, the other NEOs' annual incentive awards.
Name
 
Target Payout 
% of Salary
 
Payout Range
% of Salary
 
Actual Payout
% of Salary
 
Actual Payout (1)
Wesley G. Bush
 
180%
 
0% - 360%
 
288%
 
$4,562,000
Kathy J. Warden
 
120%
 
0% - 240%
 
192%
 
$1,920,000
Kenneth L. Bedingfield
 
100%
 
0% - 200%
 
160%
 
$1,304,000
Mark A. Caylor
 
100%
 
0% - 200%
 
160%
 
$1,328,000
Blake E. Larson (2)
 
96%
 
0% - 192%
 
153%
 
$1,127,000
(1) The potential range of bonus payouts based on 2018 performance is disclosed in the Grants of Plan-Based Awards Table. Actual bonus payouts for 2018 performance are disclosed above and in the Summary Compensation Table.
(2) Mr. Larson was elected President, Innovation Systems, effective as of the Merger Date. The actual payout utilizes full-year metrics defined under the EOIP, but reflects the higher target adjusted for the time he served as an elected officer of Northrop Grumman.

46 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


Long-Term Incentive Compensation
2018 Long-Term Incentive Program
In determining the amount of the individual long-term incentive award for an NEO (other than the CEO), the Compensation Committee considers an elected officer's individual performance during the preceding year, growth in job as demonstrated through sustained performance, leadership impact, retention and pay relative to the CEO, as well as market data for the elected officer's position based on the Target Industry Peer Group analysis.
In 2018, after determining the award value for the NEOs as described above, the Compensation Committee granted awards in the form of RPSRs to ensure sustainability and achievement of business goals over time and RSRs to provide retention value. The awards were comprised of 70% RPSRs and 30% RSRs. The Compensation Committee determined this long-term incentive mix would appropriately motivate and reward the NEOs to achieve our long-term objectives and further reinforce the link between their interests and the interests of our shareholders.
The RPSRs will vest and be distributed following the completion of the three-year performance period (commencing January 1, 2018 and ending December 31, 2020) if goals are met. The RSRs generally vest 100% after three years. Earned RPSRs and RSRs may be paid in shares, cash or a combination of shares and cash at the Compensation Committee's discretion. An executive generally must remain employed through the vesting period to earn an award. Vesting for termination due to death, disability, retirement or change in control is discussed in the "Termination Payments and Benefits" section on page 66. Dividend equivalents accrue on both RPSR and RSR awards earned and will be paid upon distribution of the RPSRs and RSRs.
The Compensation Committee evaluates RPSR performance requirements each year to ensure they are aligned with our business objectives. For the 2018 RPSR grant, the Compensation Committee determined that for the NEOs, performance metrics will continue to be relative TSR and Cumulative FCF*, equally weighted at 50%. The current metrics and weightings reflect the Company's continued emphasis on operational performance directly impacted by management decisions and behaviors, while maintaining strong alignment with shareholder interests. Based on the performance against these metrics, shares earned for 2018 RPSR grants can vary from 0% to 150% of the rights awarded.
TSR is measured by comparing cumulative stock price appreciation with reinvestment of dividends over a three-year period to the Performance Peer Group (50% of relative TSR portion of award) and to the S&P Industrials (50% of relative TSR portion of award), which comprises companies within the S&P 500 classified as Industrials, reflecting the range of similar investment alternatives available to our shareholders. To smooth volatility in the market, the TSR calculation is based on the average of the 30 calendar days immediately prior to the start of the performance period and the last 30 calendar days of the performance period. The maximum relative TSR payout is capped at 100% of target shares if the absolute TSR is negative, even if the relative TSR would have resulted in a higher score.
Cumulative FCF* focuses on cash generation after capital investments and is calculated as the aggregate free cash flow before the after-tax impact of total pension funding* over a three-year period. Free cash flow* includes funds available to create shareholder value after investing in the business through capital expenditures.
Recently Completed RPSR Performance Period (20162018)
In February 2016, when granting RPSRs to NEOs who were elected officers at the time of the grant, the Compensation Committee selected relative TSR weighted at 70% and Cumulative FCF* weighted at 30% as the performance metrics for the awards and established the performance criteria for the awards as set forth in the table below.
 
Performance Required to Score
 
 
Metric/Goal
Weighting
0%
100%
150%
2018 Actual Performance
2018 Score
Relative TSR - 2016 Performance Peer Group
35%
25th
50th
80th
45th
29%
Relative TSR - S&P Industrials
35%
25th
50th
80th
64th
43%
Cumulative FCF*
30%
$4.8B
$5.5B
$6.2B
$6.1B
43%
RPSR Performance Factor
 
 
 
 
 
115%

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 47


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


In February 2019, the Compensation Committee reviewed performance for the January 1, 2016 to December 31, 2018 RPSR performance period. The combined weighted score for the metrics generated an overall performance score of 115% (excluding the impact of Innovation Systems as detailed in "Appendix A - Use of Non-GAAP Financial Measures").
In February 2019, the NEOs received payouts in stock with respect to the outstanding RPSR awards that were granted in February 2016 for the three-year performance period ending December 31, 2018 (as described further in footnote 3 to the Outstanding Equity Awards Table on page 56).
Other Benefits
This section describes other benefits the NEOs receive. These benefits are not performance related and are designed to provide a competitive package for purposes of attracting and retaining the executive talent needed to achieve our business objectives. These benefits include retirement benefits, certain perquisites and severance arrangements.
Retirement Benefits
We maintain tax-qualified retirement plans (both defined benefit pension plans and defined contribution savings plans) that cover most of our workforce, including the NEOs. We also maintain nonqualified retirement plans that are available to our NEOs, which are designed to restore benefits that were limited under the tax-qualified plans or to provide supplemental benefits. Compensation, age and years of service factor into the amount of benefits provided under the plans. Thus, the plans are structured to reward and retain employees of long service and recognize higher performance levels as evidenced by increases in annual pay. Additional information about these retirement plans and the NEO benefits under these plans can be found in the Pension Benefits Table and Nonqualified Deferred Compensation Table, on pages 58 and 63, respectively.
The Compensation Committee assesses aggregate benefits available to the NEOs and has previously imposed an overall cap, generally limited to no more than 60% of final average pay, on pension benefits for the NEOs (except for small variations due to contractual restrictions under the plans). The nonqualified supplemental defined benefit plans in which our NEOs participate were frozen as to pay and service as of December 31, 2014.
Retiree Medical Arrangement
The Special Officer Retiree Medical Plan (SORMP) was closed to new participants in 2007 and the life insurance benefit was removed in 2018. Participants in the SORMP are entitled to retiree medical benefits pursuant to the terms of the Plan. Mr. Bush is eligible for SORMP benefits due to his date of hire and years of service as an executive. The other NEOs became elected officers after the SORMP was closed to new participants and are not eligible for SORMP benefits. The estimated cost of the SORMP benefit reflected in the Termination Payment Table is the present value of the estimated cost to provide future benefits using actuarial calculations and assumptions.
Perquisites
Our NEOs are eligible for certain limited executive perquisites that include financial planning, income tax preparation, physical exams and personal liability insurance. The Compensation Committee believes these perquisites are common within the competitive market for total compensation packages for executives and are useful in attracting, retaining and motivating talented executives. Perquisites provided to the NEOs in 2018 are detailed in the Summary Compensation Table on page 53.
Security Arrangements
Given the nature of our business, we maintain a comprehensive security program. As a component of that program, we provide residential and/or travel protection that we consider necessary to address our security requirements. In selecting the level and form of protection, we and the Board consider security risks faced by those in our industry in general and security risks specific to our Company and its individuals. Based on security threat information obtained and an ongoing dialogue with law enforcement officials, the Board has required that Mr. Bush and other NEOs receive varying levels of residential and travel protection.
Since we require this protection under a comprehensive security program and it is not designed to provide a personal benefit (other than the intended security), we do not view these security arrangements as compensation to the individuals. We report these security arrangements as perquisites as required under applicable SEC rules. In addition, we would report them as taxable compensation to the individuals if they were not excludable from income as working condition fringe benefits under Section 132 of the Internal Revenue Code.
The Board has determined that the CEO should avoid traveling by commercial aircraft for purposes of security, rapid availability and communications connectivity during travel, and should use Company-provided aircraft for all air travel. If, as a result, the CEO uses Company-provided aircraft for personal travel, the costs of such travel are imputed as income and are subject to the appropriate tax reporting according to Internal Revenue Code regulations.

48 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


We regularly review the nature of the security threat and associated vulnerabilities with law enforcement and security specialists and will continue to revise our security program as appropriate.
In September 2018, the Board of Directors approved security protection for Ms. Warden as the incoming CEO, at the same level that such security protection is currently provided to the CEO, effective immediately.
Severance Benefits
We maintain the Severance Plan for Elected and Appointed Officers of Northrop Grumman Corporation (Severance Plan), which is available to our NEOs who qualify and are approved to receive such benefits. Mr. Bush is not eligible to participate in the Severance Plan. The purpose of the Severance Plan is to help bridge the gap in an executive's income and health coverage during a period of unemployment following termination, and to ensure certain benefits for the Company.
We do not maintain any change in control severance plans. In addition, we do not provide excise tax gross-ups for any payments received upon termination after a change in control.
Upon a "qualifying termination" (defined below) the Company will provide severance benefits to eligible NEOs under the Severance Plan. Provided the NEO signs a release and agrees to certain restrictions, he or she may receive: (i) a lump sum severance benefit equal to one and one-half times annual base salary and target bonus, (ii) a prorated performance bonus for the year of termination, (iii) continued medical and dental coverage for the eighteen-month severance period, (iv) income tax preparation/financial planning fees for the year of termination and the following year and (v) outplacement expenses up to 15% of salary, all subject to management approval. The cost of providing continued medical and dental coverage is based upon current premium costs. The cost of providing income tax preparation and financial planning is capped at $18,500 for the year of termination and $18,500 for the year following termination.
A "qualifying termination" includes one of the following:
involuntary termination, other than for cause or mandatory retirement; or
election to terminate in lieu of accepting a downgrade to a non-officer position (i.e., good reason).
Change in Control Benefits
We do not maintain separate change in control programs or agreements. The only change in control benefits available to the NEOs are those described in the terms and conditions of the grants under the 2011 Long-Term Incentive Stock Plan (2011 Plan).
Policies and Procedures
Stock Ownership Guidelines
We maintain stock ownership guidelines for our NEOs to further promote alignment of management and shareholder interests. These guidelines require that NEOs own Company stock with a value denominated as a multiple of their annual salaries, which can be accumulated over a five-year period from the date of hire or promotion into an elected officer position.
The guidelines are as follows:
Position
Stock Value as a Multiple of Base Salary
Chairman and Chief Executive Officer
7x base salary
Other NEOs
3x base salary
Shares that satisfy the stock ownership guidelines include:
Company stock owned outright;
unvested RSRs; and
the value of shares held in the Northrop Grumman Savings Plan or Northrop Grumman Financial Security and Savings Program.
Unvested RPSRs are not included in calculating ownership until they are converted to actual shares owned.
The Compensation Committee reviews compliance with our stock ownership guidelines on an annual basis. As of December 31, 2018, all NEOs were in compliance with the ownership guidelines. The Compensation Committee continues to monitor compliance and will conduct a full review again in 2019.

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 49


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


Stock Holding Requirements
We have a holding period requirement for payouts from long-term incentive grants, further emphasizing the importance of sustainable performance and appropriate risk-management behaviors. Under this policy, NEOs are required to hold, for a period of three years, 50% of their net after-tax shares received from RPSR distributions and RSR vestings. These restrictions generally continue following termination and retirement; however, shares acquired from RPSR distributions following termination or retirement occurring more than one year after separation from the Company are not subject to the holding requirement.
Anti-Hedging and Pledging Policy
Company policy prohibits our NEOs and other elected officers from hedging, entering into margin transactions involving Company stock, and pledging Company securities as collateral for loans or other transactions.
Recoupment Policy
The Company's recoupment policy provides that:
the Board has discretion to recoup incentive compensation paid to an elected officer in the event of a restatement or if an elected officer engages in illegal conduct that causes significant financial or reputational harm to the Company;
the Board has discretion to recoup incentive compensation paid to the elected officer in the event the elected officer fails to report such misconduct of another, or is grossly negligent in fulfilling his or her supervisory responsibilities to prevent such misconduct; and
the CEO has discretion to recoup under similar circumstances incentive compensation provided to non-elected officers or other employees.
The Company’s recoupment policy applies to a three-year look back of performance-based short- or long-term, cash or equity incentive payments. It provides for certain disclosure in the event of recoupment, consistent with SEC and other legal requirements.
Risk Management
The Compensation Committee annually reviews our compensation program and together with the independent compensation consultant assesses potential compensation-related risks to the Company. Based on this assessment for 2018, the Compensation Committee determined that the risk profile is appropriate and substantial risk management features are incorporated into our compensation program. This determination reflects the following conclusions from the detailed risk assessment:
there is appropriate balance to mitigate compensation-related risk in the executive compensation program's design between fixed and variable pay, cash and stock components, short- and long-term measures, financial and non-financial measures, and formulaic and discretionary decisions;
there are appropriate policies in place to mitigate compensation-related risk, including the Compensation Committee's and its advisor's independence, transparent disclosure, officer stock ownership guidelines and holding period requirements, and hedging and recoupment policies; and
there are no incentive or commission arrangements below the executive level that potentially encourage excessive risk-taking behavior.
Grant Date for Equity Awards
Annual grant cycles for equity awards occur in February at the same time salary increases and annual incentive targets are determined. This timing allows the Compensation Committee to make decisions on each of these compensation components at the same time, utilizing a total compensation philosophy. The Compensation Committee reviews and approves annual long-term incentive grants during its scheduled meeting, which occurs following announcement of our year-end financial results. Equity grants may also be granted on an interim basis throughout the year for special situations, such as new executive hires, promotions or retention.
Tax Deductibility of Pay
Under prior law, Section 162(m) of the Internal Revenue Code generally limited the annual tax deduction to $1 million per person for compensation paid to the Company's CEO and the next three highest-paid NEOs, other than the Chief Financial Officer (collectively, covered employees). Certain compensation, including qualified performance-based compensation, was not subject to the deduction limit if certain requirements were met.
The 2017 Tax Act enacted on December 22, 2017, modified Section 162(m). The 2017 Tax Act expanded the definition of covered employees to include the Company's Chief Financial Officer and any employee who was a covered employee for any taxable year

50 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


beginning after December 31, 2016. The 2017 Tax Act also repealed the performance-based compensation exception to the deduction limit. These amendments, effective January 1, 2018, do not apply to compensation paid pursuant to a written binding contract in effect on November 2, 2017, that was not materially modified after such date.
Say-on-Pay
Our shareholders are asked annually to approve, on an advisory basis, the compensation paid to our NEOs. We regularly engage with our shareholders to understand their concerns regarding executive compensation. The Compensation Committee annually reviews and discusses the results of the say-on-pay vote. In 2018, our executive compensation programs continued to receive strong support from shareholders with 97% approval at our 2018 Annual Meeting of Shareholders. Based on its review and feedback from shareholder engagement, the Compensation Committee determined that our programs are effective and aligned with shareholder interests, and no substantive changes were required.

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 51


COMPENSATION COMMITTEE REPORT

The Compensation Committee reviewed and discussed the CD&A with management. Based on such review and discussion, the Compensation Committee recommended to the Board that the CD&A be included in this Proxy Statement. The Board has approved the recommendation.
COMPENSATION COMMITTEE
THOMAS M. SCHOEWE, CHAIRPERSON
MARIANNE C. BROWN
DONALD E. FELSINGER
BRUCE S. GORDON
KARL J. KRAPEK
GARY ROUGHEAD


52 I NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION TABLES | SUMMARY COMPENSATION TABLE


2018 Summary Compensation Table
Name & Principal Position
Year
 
Salary (1)
($)
 
Stock
Awards (2)
($)
 
Non-Equity Incentive Plan Compensation (3)
($)
 
Change in Pension Value and Non-Qualified Deferred Compensation Earnings (4)
($)
 
All Other Compensation (5)
($)
 
Total
($)
Wesley G. Bush
2018
 
1,578,039
 
16,924,462
 
4,562,000
 
 
1,120,758
 
24,185,259
Chairman and Chief Executive Officer
2017
 
1,548,577
 
9,999,969
 
3,662,000
 
2,733,390
 
925,121
 
18,869,057
2016
 
1,530,000
 
10,000,072
 
4,406,400
 
3,036,744
 
868,625
 
19,841,841
Kathy J. Warden
2018
 
963,462
 
9,999,869
 
1,920,000
 
 
458,976
 
13,342,307
President and
Chief Operating Officer
2017
 
807,116
 
3,499,993
 
1,061,000
 
388,015
 
206,548
 
5,962,672
2016
 
772,500
 
3,499,856
 
1,272,000
 
200,220
 
165,596
 
5,910,172
Kenneth L. Bedingfield
2018
 
811,154
 
3,500,008
 
1,304,000
 
 
302,268
 
5,917,430
Corporate Vice President and
Chief Financial Officer
2017
 
790,192
 
3,250,106
 
1,041,000
 
 
351,426
 
5,432,724
2016
 
756,539
 
2,999,980
 
1,232,000
 
 
314,724
 
5,303,243
Mark A. Caylor (6)
2018
 
790,577
 
3,900,096
 
1,328,000
 
 
127,017
 
6,145,690
Corporate Vice President and President, Mission Systems
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Blake E. Larson (6)
2018
 
426,216
 
6,499,923
 
1,127,000
 
5,297
 
35,717
 
8,094,153
Corporate Vice President and President, Innovation Systems
 
 

 

 

 

 

 

 
 

 

 

 

 

 

(1)
Includes amounts deferred under qualified savings and nonqualified deferred compensation plans. Amounts shown for Mr. Larson include salary earned since the Merger Date and payments for vacation days sold under the Orbital ATK vacation buy/sell benefit program ($7,489).
(2)
Represents the grant date aggregate fair value of RPSRs and RSRs granted during the periods presented. The 2018 value shown for Mr. Bush includes the value of his annual grant issued in February 2018 of $10,000,294 and the incremental amount that must be recognized in accordance with accounting standards for the modification to the 2017 and 2018 long-term incentive grants. The modification recognized Mr. Bush’s significant business contributions and continuing role with the Company as Chairman as well as the extension of the post-employment covenants. The fair value of awards was computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718. Assumptions used in the calculation of these amounts are disclosed in Note 14 of the Company's 2018 Form 10-K. The maximum grant date fair values of the 2018 RPSRs are as follows, noting the grants assume a 150% maximum payout:
Name
Maximum Grant Date Fair Value
($)
Mr. Bush (a)
14,487,375
Ms. Warden
10,499,979
Mr. Bedingfield
3,675,207
Mr. Caylor
3,675,207
Mr. Larson
3,150,074
(a) Includes the modification to the 2018 RPSR. For additional details refer to the Grants of Plan-Based Awards Table on page 55.
(3)
These amounts were paid based on the CPF and the NEO’s target bonus, with the exception of Mr. Larson whose payout was based on EOIP performance metrics and prorated target bonus. Includes amounts deferred under the qualified savings and nonqualified deferred compensation plans.
(4)
These amounts relate solely to the increased present value of the NEO's pension plan benefits using mandatory SEC assumptions (see the descriptions of these plans under the Pension Benefits table on page 58). The amount accrued in each year differs from the amount accrued in prior years due to an increase in age, service and pay (salary and bonus).The change in pension value is also highly sensitive to changes in the interest rate used to determine the present value of the payments to be made over the life of the executive.

NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 53


COMPENSATION TABLES | SUMMARY COMPENSATION TABLE


In 2018, the aggregate change in actuarial present value of pension benefits is a negative amount for Mr. Bush (-$2,645,152), Ms. Warden (-$25,448) and