DEF 14A 1 a2240846zdef14a.htm DEF 14A

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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 (Amendment No.          )

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Filed by a Party other than the Registrant o

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Preliminary Proxy Statement

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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

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Definitive Proxy Statement

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Definitive Additional Materials

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Soliciting Material under §240.14a-12

 

CUMMINS INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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500 Jackson Street, Box 3005, Columbus, Indiana 47202-3005    

LOGO


NOTICE OF 2020
ANNUAL MEETING OF SHAREHOLDERS



To Our Shareholders:


NOTICE IS HEREBY GIVEN that the 2020 Annual Meeting of the Shareholders of Cummins Inc. will be held at our Corporate Office Building located at 500 Jackson Street, Columbus, Indiana, on Tuesday, May 12, 2020, at 11:00 a.m. Eastern Daylight Saving Time, for the following purposes:


      
1.    to elect the eleven nominees named in the attached proxy statement as directors for the ensuing year;


      
2.    to consider an advisory vote on the compensation of our named executive officers;


      
3.    to ratify the appointment of PricewaterhouseCoopers LLP as our auditors for 2020;


      
4.    to consider a proposal from a shareholder regarding by-law amendments; and


      
5.    to transact any other business that may properly come before the meeting or any adjournment thereof.


Only shareholders of our Common Stock of record at the close of business on March 10, 2020, are entitled to notice of and to vote at the meeting.


If you do not expect to be present in person at the meeting, you are urged to vote your shares by telephone, via the Internet, or by completing, signing and dating the enclosed proxy card and returning it promptly in the envelope provided.


You may revoke your proxy card at any time before the meeting. Except with respect to shares attributable to accounts held in the Cummins Retirement and Savings Plans, any shareholders entitled to vote at the annual meeting who attend the meeting will be entitled to cast their votes in person.


We are actively monitoring the public health and travel concerns relating to the coronavirus (COVID-19) and the protocols and restrictions imposed by the federal, state, and local governments. We are focused on the health and well-being of our employees, shareholders and other stakeholders. If public health developments warrant, we will be prepared to impose additional procedures or limitations on meeting attendees, such as holding the shareholder meeting by means of remote communications (a "virtual" meeting) or other changes necessary to protect the health and safety of attendees. Any such change will be announced via press release and the filing of additional soliciting materials with the Securities and Exchange Commission. If you are planning to attend our meeting, please monitor the Investor Relations page on our website (www.cummins.com) for updated information. As always, we encourage you to vote your shares prior to the annual meeting.

MARK J. SIFFERLEN,
Secretary


March 30, 2020

 

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DATE

May 12, 2020

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TIME

11:00 a.m. Eastern Time


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RECORD DATE

March 10, 2020


VOTING


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BY THE INTERNET

Visit the website noted on your proxycard to vote online.

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BY TELEPHONE

Use the toll-free telephone number on your proxy card to vote by telephone.

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BY MAIL

Sign, date, and return your proxy card in the enclosed envelope to vote by mail.

     
     
     
     

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2020 ANNUAL SHAREHOLDER MEETING TO BE HELD ON MAY 12, 2020:
the Annual Report and Proxy Statement are available at www.proxyvote.com

 

 

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TABLE OF CONTENTS

 

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS

 

PROXY STATEMENT FOR 2020 ANNUAL SHAREHOLDERS MEETING

 

PROXY SUMMARY

 
1

CORPORATE GOVERNANCE

 
7

ELECTION OF DIRECTORS (Items 1 through 11 on the Proxy Card)

 
16

NOMINEES FOR BOARD OF DIRECTORS

 
16

EXECUTIVE COMPENSATION

 
25

ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS (Item 12 on the Proxy Card)

 
73

SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS (Item 13 on the Proxy Card)

 
74

SHAREHOLDER PROPOSAL (Item 14 on the Proxy Card)

 
78

STATEMENT IN OPPOSITION

 
79

STOCK OWNERSHIP OF DIRECTORS, MANAGEMENT AND OTHERS

 
81

OTHER BUSINESS

 
83

ANNEX A RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES

 
86

CUMMINS ANNUAL SHAREHOLDERS MEETING May 12, 2020—11:00 A.M. (Eastern Daylight Saving Time)

 
Back Cover

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LOGO

PROXY STATEMENT FOR 2020 ANNUAL SHAREHOLDERS MEETING

We are furnishing this proxy statement in connection with the solicitation by our Board of Directors of proxies to be voted at our 2020 Annual Meeting of Shareholders to be held on Tuesday, May 12, 2020, and at any adjournment thereof, which we refer to as our "Annual Meeting." This proxy statement, together with the enclosed proxy card, is first being made available to our shareholders on or about March 30, 2020.

Holders of our Common Stock of record at the close of business on March 10, 2020 are entitled to vote at the Annual Meeting. On that date there were issued and outstanding 148,122,364 shares of Common Stock, each of which is entitled to one vote on each matter submitted to a shareholder vote at the Annual Meeting.

Each share of Common Stock represented by a properly executed and delivered proxy card will be voted at the Annual Meeting in accordance with the instructions indicated on that proxy card, unless such proxy card has been previously revoked. If no instructions are indicated on a signed proxy card, the shares represented by such proxy card will be voted as recommended by our Board.

A shareholder may revoke his or her proxy card at any time before the Annual Meeting by delivering to our Secretary written notice of such revocation. This notice must include the number of shares for which the proxy card had been given and the name of the shareholder of such shares as it appears on the stock certificate(s), or in book entry form on the records of our stock transfer agent and registrar, Broadridge Corporate Issuer Solutions, Inc., evidencing ownership of such shares. In addition, except with respect to shares attributable to accounts held in the Cummins Retirement and Savings Plans (the "Cummins RSPs"), any shareholder who has executed a proxy card but is present at the Annual Meeting will be entitled to cast his or her vote in person instead of by proxy card, thereby canceling the previously executed proxy card.

Participants in the Cummins RSP who hold shares of Common Stock in their account and provide voting instructions to the trustee with respect to such shares will have their shares voted by the trustee as instructed. Such participants will be considered named fiduciaries with respect to the shares allocated to their accounts solely for purposes of this proxy solicitation. If no voting instructions are provided, shares held in the accounts will be voted in the same manner and proportion as shares with respect to which valid voting instructions were received. Any instructions received by the trustee from participants regarding their vote shall be confidential. Cummins RSP participants may attend the Annual Meeting but cannot vote the shares in their Cummins RSP accounts in person at the Annual Meeting.

IMPORTANT: If you hold your shares in a brokerage account, you should be aware that, due to New York Stock Exchange, or NYSE, rules, if you do not affirmatively instruct your broker how to vote within 10 days prior to our Annual Meeting, your broker will not be permitted to vote your shares (i) for the election of directors; (ii) on the advisory vote on the compensation of our named executive officers; or (iii) on the shareholder proposal regarding by-law amendments. Therefore, you must affirmatively take action to vote your shares at our Annual Meeting. If you do not affirmatively vote your shares, your shares will not be voted (i) for the election of directors, (ii) on the advisory vote on the compensation of our named executive officers, or (iii) on the shareholder proposal regarding by-law amendments.


 

 

 

 

PROXY SUMMARY

 

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PROXY SUMMARY

This summary highlights selected information contained in this proxy statement, but it does not contain all the information you should consider. We urge you to read the whole proxy statement before you vote. This proxy statement is being made available to shareholders on or about March 30, 2020.

 WE WILL BE VOTING ON THE FOLLOWING MATTERS:
    Agenda Item   Voting Recommendation   More Information    
    1. Election of eleven directors nominated by Cummins' Board   FOR EACH NOMINEE   Page 16    
    2. Advisory vote on the compensation of our named executive officers   FOR   Page 73    
    3. Selection of independent public accountants   FOR   Page 74    
    4. Shareholder proposal   AGAINST   Page 78    


                Committee Memberships
        Age   Director
Since
  Audit   Comp   Finance   Governance   Safety
Environment
and Tech
PHOTO   N. THOMAS LINEBARGER

Chairman and Chief Executive Officer, Cummins Inc.

  57   2009          
PHOTO   ROBERT J. BERNHARD

Vice President for Research, University of Notre Dame

  67   2008  
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PHOTO   FRANKLIN R. CHANG DIAZ

Chairman and CEO, Ad Astra Rocket Company

  69   2009      
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PHOTO   BRUNO V. DI LEO

Managing Director, Bearing North LLC

  63   2015      
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PHOTO   STEPHEN B. DOBBS

Retired Senior Group President, Fluor Corporation

  63   2010  
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PHOTO   ROBERT K. HERDMAN

Managing Director, Kalorama Partners, LLC

  71   2008  
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PHOTO   ALEXIS M. HERMAN

Chairman and CEO, New Ventures, LLC

  72   2001      
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PHOTO   THOMAS J. LYNCH

Chairman, TE Connectivity Ltd.

  65   2015    
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PHOTO   WILLIAM I. MILLER

President, The Wallace Foundation

  63   1989  
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PHOTO   GEORGIA R. NELSON

Retired President and CEO, PTI Resources, LLC

  70   2004  
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PHOTO   KAREN H. QUINTOS

Chief Customer Officer, Dell Technologies Inc.

  56   2017  
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GRAPHIC  Chair       GRAPHIC  Member


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2        CUMMINS  2020 PROXY

 

PROXY SUMMARY

 

 

OUR 2019 PERFORMANCE*

In 2019, our revenues decreased 1 percent compared to 2018, due to a sharp slowdown in demand in the second half of the year in many of our largest markets. The Company responded quickly to the weakening demand in the second half of the year and initiated a number of actions to reduce costs, including a $119 million ($90 million after tax) restructuring charge. These actions will help set the business up for stronger performance when market demand improves.

Full year revenues in North America increased 3 percent and represented 62 percent of our total revenues while international revenues decreased by 6 percent. Cash flow from operations generated in 2019 was the strongest on record, which allowed us to reinvest in our business and return record levels of cash to shareholders. In total, we returned a record $2.0 billion of cash to shareholders, repurchasing 8.1 million shares of our Common Stock and increasing our dividend by 15%.

Key business highlights, which exclude the one-time restructuring charge, include:

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* See Annex A for reconciliation of GAAP to non-GAAP measures referenced in this section.


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PROXY SUMMARY

 

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COMPOSITION OF THE BOARD

BOARD INDEPENDENCE AND DIVERSITY    

Our Board represents a balance of longer-tenured members with in-depth knowledge of our business and newer members who bring valuable additional attributes, skills and experience. Ten of our eleven directors are independent and provide strong oversight of our long-term strategy. We believe that directors with different backgrounds and experiences makes our boardroom and our company stronger.

 

 

 

 

 

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QUALIFICATIONS, SKILLS AND EXPERIENCE

Our Board embodies a broad and diverse set of qualifications, skills and experiences as illustrated below.

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4        CUMMINS  2020 PROXY

 

PROXY SUMMARY

 

 

CORPORATE GOVERNANCE HIGHLIGHTS

We long have believed that good corporate governance is important in ensuring that we are managed for the long-term benefit of our shareholders.

Board Leadership   Board Accountability   Board Evaluation and Effectiveness
         


Annual assessment and determination of Board leadership structure

Lead Director has strong role and significant governance duties, including chair of Governance & Nominating Committee and of all executive sessions of independent directors

 


All directors are elected annually via majority voting standard

Board has adopted proxy access, shareholder right to call special meetings, and shareholder right to amend By-laws

 

Use of third party consultant to facilitate feedback discussions for Board performance and areas of improvement

Annual feedback and evaluation session by each Committee Chair with its members

         
Board Risk Oversight   Shareholder Engagement   Board Refreshment and Diversity
         


The Board and its Committees exercise robust oversight of the company's enterprise risk management program with dedicated time at every regular Board meeting

 


Our CEO and at least one independent board member routinely meet with top shareholders for conversations focused on our Board's skill set and refreshment and its oversight of a variety of topics including company strategy, growth, risk management, and ESG issues

 

4 new directors added to Board in last 5 years; 9 new directors since 2008

Board members represent diverse perspectives, including 3 female directors, 1 African-American director and 2 directors from Latin America

2019 RECOGNITION HIGHLIGHTS

Our practices and policies have earned Cummins recognition on a range of issues.


 


NAMED TO THE DOW JONES INDICES OF THE MOST SUSTAINABLE COMPANIES IN NORTH AMERICA. IT WAS THE 14TH CONSECUTIVE YEAR CUMMINS MADE THE LIST.


 


NAMED TO THE FTSE4GOOD INDEX IN 2019 WHICH MEASURES STRONG ENVIRONMENTAL, SOCIAL AND GOVERNANCE PRACTICES
       

 


NAMED ONE OF THE WORLD'S MOST ETHICAL COMPANIES BY THE ETHISPHERE INSTITUTE, A LEADER IN ADVANCING ETHICAL BUSINESS PRACTICES. THE COMPANY HAS BEEN ON THE LIST FOR 13 CONSECUTIVE YEARS.


 


NAMED TO DIVERSITY BEST PRACTICES INCLUSION INDEX IN 2019 FOR PERFORMANCE IN RECRUITMENT, RETENTION, ADVANCEMENT AND COMPANY CULTURE
   

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PROXY SUMMARY

 

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EXECUTIVE COMPENSATION

ADVISORY VOTE ON EXECUTIVE COMPENSATION

Our long-term success depends on our ability to attract, motivate, focus and retain highly talented individuals who are committed to the Cummins vision, strategy, and corporate culture. To that end, our executive compensation program is designed to link our executives' pay to their individual performance, to Cummins' annual and long-term performance, and to successful execution of Cummins' business strategies. We also use our executive compensation program to encourage high-performing executives to remain with us over the course of their careers.

We believe the compensation packages for our Named Executive Officers reflect their extensive management experience, continued high performance, and exceptional service to Cummins. We also believe our compensation strategies have been effective in attracting executive talent and promoting performance and retention.

EXECUTIVE COMPENSATION PRINCIPLES

We believe the level of compensation received by executives should be closely tied to our corporate financial and stock price performance. This principle is apparent in the design of our executive compensation program and in the specific compensation packages we award.

In addition to aligning our executives' pay with performance, we follow several other principles when designing and implementing our executive compensation program.

(i)    market positioning   (iii)    pay at risk   (v)    retention
(ii)  short-term/long-term balance   (iv)    alignment with shareholders interests   (vi)  simple and transparent

EXECUTIVE COMPENSATION ELEMENTS

Compensation Element   Form of Payment   Performance Metrics   Rationale
Base salary   Cash   Individual Performance   Market-based to attract and retain skilled executives. Designed to recognize scope of responsibility, individual performance, and experience.
Annual bonus   Cash   Return on Average Net Assets (ROANA) using EBITDA   Rewards operational performance. ROANA balances growth, profitability, and asset management.
Long-term incentive compensation   Performance cash (34%), Performance shares (33%) and Stock options (33%)   Return on Invested Capital (ROIC), weighted at 80% and EBITDA, weighted at 20% over a three-year period for performance cash and performance shares.   ROIC and EBITDA provide an incentive for profitable growth and correlate well with shareholder value.

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TARGET COMPENSATION MIX

We believe the compensation of our most senior executives should be based on Cummins' overall performance, every executive's pay is tied to the same financial metrics and a significant amount of their pay is incentive-based and therefore at risk.


TARGET TOTAL DIRECT COMPENSATION MIX – FISCAL YEAR 2019

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CORPORATE GOVERNANCE

 

CUMMINS  2020 PROXY        7

 

 

CORPORATE
GOVERNANCE

We long have believed that good corporate governance is important in ensuring that we are managed for the long-term benefit of our shareholders. We regularly engage with our shareholders to understand their expectations. We also benchmark our governance structure and policies against industry best practices and the practices of other comparable public companies. Our corporate governance principles, charters for each of our Board's Audit, Compensation and Governance and Nominating Committees, our code of business conduct and our by-laws, along with certain other corporate governance documents, are available on our website, www.cummins.com, and are otherwise available in print to any shareholder who requests them from our Secretary.

CORPORATE GOVERNANCE OVERVIEW

Director Independence

10 of 11 director nominees are independent

5 fully independent Board Committees: Audit; Compensation; Governance & Nominating; Finance; and Safety, Environment & Technology

  Board Leadership

Annual assessment and determination of Board leadership structure

Annual election of independent Lead Director whenever Chairman/CEO roles are combined or when the Chairman is not independent

Lead Director has strong role and significant governance duties, including chair of Governance & Nominating Committee and of all executive sessions of independent directors

  Board Accountability

All directors are elected annually via majority voting standard

Shareholder right to call special meetings (10% of voting power threshold)

Proxy access for director nominees available to a shareholder, or group of up to 20 shareholders, holding a total of at least 3% of our common stock for at least 3 years

Shareholder right to unilaterally amend the by-laws (upon a majority vote)

Board Evaluation and Effectiveness

Use of third party consultant to facilitate feedback discussions for Board performance and areas of improvement

Annual feedback and evaluation session by each Committee chair with its committee members

Annual two-way feedback and evaluation sessions by Chairman with each director

Annual independent director evaluation of Chairman and CEO

  Board Risk Oversight

The Board and its Committees exercise robust oversight of the company's enterprise risk management program with dedicated time at every regular Board meeting

Top tier risks are assigned to members of the Cummins Leadership Team and the Board dedicates time to review top risks at every regular Board meeting

  Shareholder Engagement

Our CEO and at least one independent Board member routinely meet with top shareholders for conversations focused on our Board's skill set and refreshment and its oversight of a variety of topics including company strategy, growth, risk management, governance and ESG issues

Board Refreshment and Diversity

4 new directors added to Board in last 5 years; 9 new directors since 2008

Board members represent diverse perspectives, including 3 female directors, 1 African-American director and 2 directors from Latin America

Goal of rotating committee assignments every 3 to 5 years

Mandatory director retirement age

  Director Engagement

All of the directors attended 75% or more of the aggregate number of meetings of our Board and the committees on which they served during 2019

Limits on director/CEO membership on other public company boards

Our directors routinely visit company locations without our CEO present to interact directly with managers and employees; in the last two years, individual directors visited 13 different locations in China, India, Australia and the United States

  Clawback and Anti-Hedging Policies

Clawback policy permits us to recoup certain compensation payments in the event any of our financial statements are required to be materially restated resulting from the fraudulent actions of any officer

Directors and officers prohibited from engaging in any pledging, short sales or hedging investments involving our common stock


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8        CUMMINS  2020 PROXY

 

CORPORATE GOVERNANCE

ADDITIONAL GOVERNANCE FEATURES

DIRECTOR SELECTION AND BOARD REFRESHMENT

It is a top priority of our Board and our Governance and Nominating Committee that our directors have the skills, background and values to effectively represent the long-term interests of our shareholders and other stakeholders. Throughout the year, our Board reviews a matrix of the qualifications, skills and experience that we believe our Board needs to have and discusses whether there are any gaps that need to be filled that will improve our Board's performance. We assess potential new director candidates in light of the matrix and whether they possess the qualifications, skills and experience needed by our Board. When we identify potential new director candidates, we review extensive background information compiled by our professional search firm, evaluate their references, consider their prior board experience and conduct in-person interviews.

We also believe that new perspectives and ideas are essential for an innovative and strategic board. Since 2008, we have added nine new directors to our Board, including the two new directors we added in 2017. In addition, the Governance and Nominating Committee routinely reviews the Board's committee assignments with a goal of rotating membership on committees every three to five years. The committee assignments were most recently rotated in May 2017 and will be rotated again in May 2020. Our Board will continue to review and refresh the skills, qualifications and experiences that our Board needs to have to serve the long-term interests of our shareholders.

As required by our corporate governance principles, our Governance and Nominating Committee must recommend director nominees such that our Board is comprised of a substantial majority of independent directors and possesses a variety of experience and backgrounds, including those who have substantial experience in the business community, those who have substantial experience outside the business community (such as public, academic or scientific experience), and those who will represent our stakeholders as a whole rather than special interest groups or individual constituencies.

Each candidate must have sufficient time available to devote to our affairs and be free of any conflict of interest that would violate any applicable law or regulation or interfere with the proper performance of his or her responsibilities, including being able to represent the best long-term interests of all of our shareholders and other stakeholders. Each candidate also should possess substantial and significant experience that would be of particular importance to us in the performance of his or her duties as a director. The Committee does not intend to alter the manner in which it evaluates candidates, including the foregoing criteria, based on whether or not the candidate was recommended by a shareholder.

IMPORTANCE OF DIVERSITY

One of our core values is diversity and inclusion. In evaluating candidates for our Board, our Governance and Nominating Committee considers only potential directors who share this value, as well as our other core values of integrity, caring, excellence and teamwork. As reflected in our corporate governance principles, we are committed to equal employment opportunity in assembling our Board. We believe that directors with different backgrounds and experiences makes our boardroom and our company stronger. As our Committee considers possible directors, it seeks out candidates who represent the diverse perspectives of all of our stakeholders. We believe our Board has been effective in assembling a highly qualified, diverse group of directors. We currently have three female directors, one African-American director and two directors from Latin America. We will continue to identify opportunities to enhance our Board diversity as we consider future candidates.


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CORPORATE GOVERNANCE

 

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SHAREHOLDER OUTREACH

We believe that meaningful corporate governance should include regular conversations between our directors and our shareholders. In 2019, our CEO and at least one independent Board member met with shareholders for conversations focused on our Board's skill set and refreshment and its oversight of a variety of topics, including company strategy, growth, risk management, and Environmental, Social and Governance, or ESG, issues. In addition, our Corporate Secretary held discussions with several top investors to capture their input on governance matters and practices. In total, we met with shareholders that hold approximately 30% of our outstanding shares in 2019. We capture the feedback from these sessions and present it to the full Board for its consideration.   GRAPHIC

SUCCESSION PLANNING

CEO and leadership succession planning is one of our Board's most important responsibilities. Several times a year, our full Board discusses succession planning for our CEO and other critical leaders of the company. At least once a year, our Board dedicates itself to examining the succession plans for our complete leadership team.


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10        CUMMINS  2020 PROXY

 

CORPORATE GOVERNANCE

 

SUSTAINABILITY AND ESG

With the support and oversight of our Board, we continue to focus on sustainability, including our efforts related to environmental, social and governance issues (ESG). Below is a summary of our achievements over the past 12 months:

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Cummins reports extensively on its sustainability efforts following the standards of the Sustainability Accounting Standards Board (SASB). For more information on our sustainability and ESG program, please go to: https://www.cummins.com/company/global-impact/sustainability. Websites disclosed herein are not incorporated into this proxy statement by reference.

INDEPENDENCE

Ten of our eleven directors qualify as independent directors within the meaning of the rules adopted by the Securities and Exchange Commission, or SEC, and the corporate governance standards for companies listed on the NYSE. Pursuant to the requirements of the NYSE, our Board has adopted independence standards that meet


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CORPORATE GOVERNANCE

 

CUMMINS  2020 PROXY        11

 

or exceed the independence standards of the NYSE, including categorical standards to assist the Governance and Nominating Committee and our Board in evaluating the independence of each director. The categorical standards are included in our corporate governance principles, which are available on our website at www.cummins.com. A copy also may be obtained upon written request.

Following a discussion and applying the standards referenced above, the Governance and Nominating Committee of our Board determined that all directors standing for election, except N. Thomas Linebarger, our Chief Executive Officer, qualified as independent. Based on the recommendation of the Committee, our full Board approved this conclusion.

LEADERSHIP STRUCTURE

Our corporate governance principles describe in detail how our Board must conduct its oversight responsibilities in representing and protecting our company's stakeholders. As stated in the principles, our Board has the freedom to decide whom our Chairman and Chief Executive Officer should be based solely on what it believes is in the best interests of our company and its shareholders. Currently, our Board believes it is in the best interests of our company for the roles of our Chairman and Chief Executive Officer to be combined and to appoint a Lead Director from among our independent directors.

Our Board believes that this leadership structure currently assists our Board in creating a unified vision for our company, streamlines accountability for our performance and facilitates our Board's efficient and effective functioning.

Our Board evaluates its policy on whether the roles of our Chairman and Chief Executive Officer should be combined on an annual basis. In doing so, our Board considers the skills, experiences and qualifications of our then-serving directors (including any newly elected directors), the evolving needs of our company, how well our leadership structure is functioning, and the views of our shareholders.

Based on its review of our leadership structure, our Board continues to believe that Mr. Linebarger, our Chief Executive Officer, is the person best qualified to serve as our Chairman given his history in executive positions with our company and his skills and experience in the industries in which we operate. Alexis M. Herman is our Lead Director. Ms. Herman was selected for this position because of her service on our Board since 2001, her experience as the U.S. Secretary of Labor and her other experiences in leadership positions in the private and public sectors. Ms. Herman is actively involved in setting and approving the Board's agendas and focus. She works to create a collaborative atmosphere that leverages the strengths of our diverse Board and encourages directors to actively question management when necessary and seeks to ensure that our Board is receiving the information necessary to complete its duties. Ms. Herman meets with other directors and members of senior management outside of the regularly scheduled Board meetings to ensure that our Board is functioning effectively and to identify areas of potential improvement.

OUR LEAD DIRECTOR'S RESPONSIBILITIES INCLUDE:

SERVING as Chairman of the Governance and Nominating Committee;

CONFERRING with the Chairman on, and approving, Board meeting agendas and meeting schedules to assure there is sufficient time for discussion of all agenda items;

CALLING AND PRESIDING over all meetings of the Board at which the Chairman is not present, including executive sessions of independent directors and communicating feedback on executive sessions to the Chairman;

LEADING the annual performance reviews of the Chief Executive Officer and the Board;

ENSURING that there is open communication between our independent directors and the Chairman and other management members;

BEING AVAILABLE, when deemed appropriate by the Board, for consultation and direct communication with shareholders;

REVIEWING, at his or her discretion, information to be sent to the Board; and

CONFERRING with the Chairman on other issues of corporate importance, as appropriate.


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12        CUMMINS  2020 PROXY

 

CORPORATE GOVERNANCE

 

 

RISK OVERSIGHT

Our Board and its committees are involved on an ongoing basis in the oversight of our material enterprise-related risks. The company has a mature enterprise risk management program that identifies, categorizes and analyzes the relative severity and likelihood of the various types of material enterprise-related risks to which we are or may be subject. The company has an executive risk council, comprised of the Chief Operating Officer, Chief Financial Officer, General Counsel, Vice President – Corporate Strategy and Chief Administrative Officer that meets quarterly with our leader of enterprise risk management to review and update our material enterprise-related risks and their mitigation plans. We assign ownership of our most significant enterprise risks to a member of our Leadership Team.

Depending upon the type of the material identified enterprise risks, our Board, Audit Committee, Finance Committee, Compensation Committee, Governance and Nominating Committee and/or Safety, Environment and Technology Committee then receive periodic reports and information directly from our senior leaders who have functional responsibility for the management of such risks. Our Board and/or its respective appropriate committee then reviews such information, proposed mitigation strategies and plans, and monitors our progress on mitigating such risks. For example, in 2019, our Board engaged outside experts to provide education on the enterprise cyber security risks in our industry and to complete a review of the status of our enterprise cyber security program. As a result of this review, the Board updated its oversight schedule and priorities for 2020. Our Board's and its committees' roles in the oversight process of our identified material risks have not impacted our Board's leadership structure.

BOARD OF DIRECTORS AND COMMITTEES

Our Board held seven meetings during 2019. All of the directors attended 75% or more of the aggregate number of meetings of our Board and the committees on which they served that were held during the periods in which they served. The non-employee members of our Board also met in executive session without management present as part of each regular meeting. Alexis M. Herman, our Lead Director, presided over these sessions.

Under our corporate governance principles, our Board has established six standing committees, with five of the committees consisting entirely of independent directors. Certain of the principal functions performed by these committees and the members of our Board currently serving on these committees are as follows:

AUDIT COMMITTEE

Meetings in 2019: 9

Members
Robert K. Herdman (Chair)
Robert J. Bernhard
Stephen B. Dobbs
William I. Miller
Georgia R. Nelson
Karen H. Quintos

KEY RESPONSIBILITIES

Oversees the integrity of our financial statements and related financial disclosures and internal controls over financial reporting.

Reviews our accounting principles and procedures.

Monitors the independence and performance of our external and internal auditors.

Exercises oversight of the company's enterprise risk management program with dedicated time at every regular Board meeting.

Oversees the company's compliance with its ethics policies and legal and regulatory requirements.

All members are independent directors as defined under our independence criteria, SEC rules and NYSE listing standards, including those specifically applicable to audit committee members. Our Board has determined that Mr. Herdman is an "audit committee financial expert" for purposes of the SEC's rules.


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COMPENSATION COMMITTEE

Meetings in 2019: 6

Members
Georgia R. Nelson (Chair)
Robert K. Herdman
Thomas J. Lynch
William I. Miller

KEY RESPONSIBILITIES

Reviews and approves the company's compensation philosophy and strategy for the Board and the officers of the company.

Administers and determines eligibility for, and makes awards under, our incentive plans.

Establishes goals and approves the compensation for our Chief Executive Officer following a review of his performance, including input from all of the other independent directors.

Reports annually in the proxy statement regarding the company's executive compensation programs.

Conducts an annual compensation risk assessment.

All members are independent directors as defined under our independence criteria, SEC rules and NYSE listing standards, including those specifically applicable to compensation committee members. The Compensation Committee engaged Farient Advisors LLC as its independent compensation consultant in 2019 to provide input and advice to the Committee concerning the compensation of our officers and our Board and related matters.

   

FINANCE COMMITTEE

Meetings in 2019: 3

Members
Thomas J. Lynch (Chair)
Franklin R. Change Diaz
Bruno V. Di Leo
Alexis M. Herman

KEY RESPONSIBILITIES

Reviews and advises our management and our Board on our financial strategy pertaining to our capital structure, creditworthiness, dividend policy, share repurchase policy, and financing requirements.

Reviews our banking relationships and lines of credit.

Reviews and advises on financing proposals for acquisitions, partnerships and other alliances of the company.

Discusses key areas of shareholder interest and feedback on our performance and strategy.

Monitors our shareholder base and provides counsel on investor relations activity.

All members are independent directors as defined under our independence criteria, SEC rules and NYSE listing standards.

GOVERNANCE AND NOMINATING COMMITTEE

Meetings in 2019: 5

Members
Alexis M. Herman (Chair)
Robert J. Bernhard
Franklin R. Chang Diaz
Bruno V. Di Leo
Stephen B. Dobbs
Robert K. Herdman
Thomas J. Lynch
William I. Miller
Georgia R. Nelson
Karen H. Quintos

KEY RESPONSIBILITIES

Reviews and makes recommendations to our Board with respect to its membership, size, composition, procedures and organization.

Identifies potential director candidates to ensure the Board is composed of well qualified and diverse candidates to oversee and lead the company; engages a professional search firm to identify potential director candidates based on criteria selected by the Committee; and interviews identified candidates.

Ensures the Board has a robust process for evaluating its performance and the performance of its committees including the use of a third party consultant to facilitate feedback among board members.

Ensures the Board is providing effective ongoing director education and new director orientation.

All members are independent directors as defined under our independence criteria, SEC rules and NYSE listing standards.


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CORPORATE GOVERNANCE

 

 

   

SAFETY, ENVIRONMENT AND TECHNOLOGY COMMITTEE

Meetings in 2019: 5

Members
Stephen B. Dobbs (Chair)
Robert J. Bernhard
Franklin R. Change Diaz
Bruno V.Di Leo
Alexis M. Herman
Karen H. Quintos

KEY RESPONSIBILITIES

Reviews the company's safety program with an emphasis on employee, workplace and product safety.

Reviews the environmental management of our facilities and operations.

Reviews our key technology developments that may impact product competitiveness for both core and new business areas.

Reviews public policy developments, strategies and positions taken by us with respect to safety, environmental and technological matters that significantly impact us or our products.

Reviews product and service quality performance and guides our strategies and improvement initiatives.

EXECUTIVE COMMITTEE

The members of our Executive Committee are N. Thomas Linebarger (Chairman), William I. Miller and Alexis M. Herman. Our Executive Committee is authorized to exercise the powers of our Board in the management and direction of our business and affairs during the intervals between meetings of our Board. It also acts upon matters specifically delegated to it by our Board. Our Executive Committee did not meet during 2019.

SHAREHOLDER NOMINATIONS

Shareholder director candidate recommendations, including biographical information as to the proposed candidate and a statement from the shareholder as to the qualifications and willingness of such person to serve on our Board, along with the required disclosures set forth in our by-laws, must be properly and timely submitted in writing to our Secretary, as further described below. Any shareholder entitled to vote for the election of directors at a meeting may nominate a person or persons for election as directors only if written notice of such shareholder's intent to make such nominations is given, either by personal delivery or by mail, postage prepaid, to the Secretary of our company not later than 160 days in advance of the originally scheduled date of such meeting (provided, however, that if the originally scheduled date of such meeting is earlier than the anniversary of the date of the previous year's annual meeting, such written notice may be so given and received not later than the close of business on the 10th day following the date of the first public disclosure, which may include any public filing by us with the SEC, of the originally scheduled date of such meeting).

Each notice required by our by-laws must be signed manually or by facsimile by the shareholder of record and must set forth the information required by our by-laws, including (i) the name and address, as they appear on our books, of the shareholder who intends to make the nomination and of any beneficial owner or owners on whose behalf the nomination is made; (ii) a representation that the shareholder is a holder of record of shares of our Common Stock entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) certain other information regarding the shareholder and its interests in our company; (iv) the name, age, business address and residential address of each nominee proposed in such notice; (v) the principal occupation or employment of each such nominee; (vi) the number of shares of our capital stock that are owned of record or beneficially by each such nominee; (vii) with respect to each nominee for election or reelection to our Board, a completed and signed questionnaire, representation and agreement described in our by-laws; (viii) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the SEC had each nominee been nominated, or intended to be nominated, by our Board; (ix) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, including all arrangements or understandings


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pursuant to which the nominations are being made, between or among such shareholder and beneficial owner, if any, and their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or any other person or persons (naming such person or persons), on the other hand; and (x) the written consent of each nominee to serve as a director if so elected.

The deadline for receiving any written notice of a shareholder's intent to make a nomination with respect to the Annual Meeting was the close of business on December 4, 2019, which was 160 days in advance of the Annual Meeting (which is typically held on the second Tuesday of each May). We received no such qualifying nominations before this deadline with respect to the Annual Meeting.

COMMUNICATION WITH THE BOARD OF DIRECTORS

Shareholders and other interested parties may communicate with our Board, including our Lead Director and other non-management directors, by sending written communication to the directors c/o our Secretary, 301 East Market Street, Indianapolis, Indiana 46204. All such communications will be reviewed by the Secretary or his designee to determine which communications are appropriate to be forwarded to the directors. All communications will be forwarded except those that are related to our products and services, are solicitations or otherwise relate to improper or irrelevant topics as determined in the sole discretion of the Secretary or his designee.

Our Secretary maintains and provides copies of all such communications received and determined appropriate to be forwarded to the Governance and Nominating Committee in advance of each of its meetings and reports to the Committee on the number and nature of communications that were not determined appropriate to be forwarded.

We require all of our director nominees standing for election at an annual meeting of shareholders to attend such meeting. All director nominees standing for election at our 2019 Annual Meeting of Shareholders were present in person except for Mr. Bernhard and Mr. Freeland. We currently expect all director nominees to be present in person at the Annual Meeting.


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ELECTION OF DIRECTORS

 

 

ELECTION
OF DIRECTORS

(ITEMS 1 THROUGH 11 ON THE PROXY CARD)

GENERAL

All eleven of our directors are nominated for reelection at the Annual Meeting to hold office until our 2021 annual meeting of shareholders and until their successors are elected and qualified. Any submitted proxy will be voted in favor of the nominees named below to serve as directors unless the shareholder indicates to the contrary on his or her proxy. All nominees have been previously elected to our Board by our shareholders and have served continuously since the date indicated below.

MAJORITY VOTE REQUIRED FOR DIRECTOR ELECTIONS

To be elected, each director nominee must receive a majority of the votes cast by shareholders at the Annual Meeting. Receipt by a nominee of the majority of votes cast means that the number of shares voted "for" exceeds the number of votes "against" that nominee. Abstentions and broker non-votes are not counted as a vote either "for" or "against" a nominee. Our by-laws provide that the term of any incumbent director who receives more "against" votes than "for" votes in an uncontested election will automatically terminate at the shareholder meeting at which the votes were cast. In the case of a contested election, directors will be elected by a plurality of the votes represented in person or by proxy and entitled to vote in the election.

Our Board expects that each of the nominees will be able to serve as a director if elected at the Annual Meeting, but if any of them is unable to serve at the time the election occurs, proxies received that have been voted either for such nominee or for all nominees or which contain no voting instructions will be voted for the election of another nominee to be designated by our Board, unless our Board decides to reduce the number of our directors.

NOMINEES FOR BOARD OF DIRECTORS

The names of the nominees for directors, together with biographical sketches, including their business experience during the past five years, directorships of other public corporations and their qualifications to serve on our Board are set forth below. Our nominees are listed below, beginning with our Chairman and Chief Executive Officer, then followed by our independent directors in alphabetical order.


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OUR BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR EACH OF THE NOMINEES SET FORTH BELOW.

  PHOTO

Director Since: 2009

Age: 57

Board Committees:
Executive

N. THOMAS LINEBARGER—Chairman and Chief Executive Officer, Cummins Inc.

Mr. Linebarger became the Chairman of the Board and Chief Executive Officer of our company on January 1, 2012. Mr. Linebarger was our President and Chief Operating Officer from 2008-2011 after serving as Executive Vice President and President, Power Generation Business from 2003 to 2008 and as Vice President, Chief Financial Officer from 2000 to 2003. From 1998 to 2000, he was our Vice President, Supply Chain Management, after holding various other positions with us. Mr. Linebarger received a B.S. from Stanford University and a B.A. from Claremont McKenna College in 1986 and M.S. and M.B.A. degrees from Stanford in 1993. He has been a director of Harley-Davidson, Inc. since 2008.

Summary of Qualifications and Experience:

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Key Contributions to the Board:

Provides strategic leadership for the Board with decades of experience with our global business

Seeks to ensure directors are informed of significant issues impacting our company and receive necessary information

Works collaboratively with our Lead Director to set agendas for Board meetings and assess the engagement and effectiveness of our Board, its committees, and individual directors

Ensures that there are strong succession plans in place for the CEO and other key leaders

 

  PHOTO

Director Since: 2008

Age: 67

Board Committees:
Audit; Governance and Nominating; Safety, Environment and Technology

ROBERT J. BERNHARDVice President for Research and Professor in the Department of Aerospace and Mechanical Engineering, University of Notre Dame

Mr. Bernhard joined the University of Notre Dame in 2007 and prior to that was Associate Vice President for Research at Purdue University since 2004. He also held Assistant, Associate and full Professor positions at Purdue University. He was Director of the Ray W. Herrick Laboratories at Purdue's School of Mechanical Engineering from 1994 to 2005. Mr. Bernhard is also a Professional Engineer and earned a B.S.M.E. and Ph.D., E.M. from Iowa State University in 1973 and 1982, and an M.S.M.E. from the University of Maryland in 1976. He was the Secretary General of the International Institute of Noise Control Engineering (I-INCE) from 2000 to 2015, and

is currently the President of I-INCE. He is a Fellow of the International Institute of Noise Control Engineering, the Acoustical Society of America and the American Society of Mechanical Engineering.

Summary of Qualifications and Experience:

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Key Contributions to the Board:

Leverages technical background to offer valuable insight

Pushes for improvement in safety and technology planning

Mentors our technical leaders


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    PHOTO

Director Since: 2009

Age: 69

Board Committees:
Finance; Governance
and Nominating;
Safety, Environment
and Technology

DR. FRANKLIN R. CHANG DIAZFounder, Chairman and Chief Executive Officer, Ad Astra Rocket Company

Dr. Chang Diaz is Chairman and Chief Executive Officer of Ad Astra Rocket Company, a U.S. spaceflight engineering company based in Houston, Texas and dedicated to the development of advanced in-space electric propulsion technology. Ad Astra also develops space-derived Earth applications in clean renewable hydrogen energy storage for stationary applications and electric transportation. Dr. Chang Diaz founded Ad Astra in 2005 following his retirement from NASA after a 25-year career during which he flew seven space missions and logged over 1,600 hours in space. In 1994, Dr. Chang Diaz founded and directed NASA's Advanced Space Propulsion Laboratory at the Johnson Space Center where he managed a multicenter research team

developing new plasma rocket technology. Dr. Chang Diaz is a dual citizen of Costa Rica and the United States. As part of his involvement in Costa Rica's development, Dr. Chang Diaz currently leads the implementation of the "Strategy for the XXI Century," a plan to transform Costa Rica into a fully developed nation by the year 2050. Dr. Chang Diaz received the Liberty Medal in 1986 from President Ronald Reagan and is a four-time recipient of NASA's Distinguished Service Medal, the agency's highest honor. Dr. Chang Diaz also serves as an Adjunct Professor of Physics at Rice University and the University of Houston.

Summary of Qualifications and Experience:

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Key Contributions to the Board:

Brings an expansive view of technology matters

Pushes our Board to think long-term in technology planning

Well-versed in international business issues

Strong engagement in the development of our Latin America business


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  PHOTO

Director Since: 2015

Age: 63

Board Committees:
Finance; Governance
and Nominating;
Safety, Environment
and Technology

BRUNO V. DI LEO ALLEN–Managing Director, Bearing-North LLC

Mr. Di Leo has been the Managing Director of Bearing-North LLC, an independent advisory firm focused on business expansion and senior executive counseling in strategy and operations, since 2018. Prior to this role, Mr. Di Leo served as Senior Vice President of International Business Machines Corporation, or IBM, a globally integrated technology and consulting company, from January 2018 until his retirement in June 2018. He had previously served as Senior Vice President, Global Markets, for IBM since 2012. In that position, he was accountable for revenue, profit, and client satisfaction in Japan, Asia Pacific, Latin America, Greater China and the Middle East and Africa. He also oversaw IBM's Enterprise and Commercial client segments globally. From

2008 to 2011, he was General Manager for IBM's Growth Markets Unit based in Shanghai. Mr. Di Leo has more than 40 years of business leadership experience in multinational environments, having lived and held executive positions on four continents.

Mr. Di Leo has served as a director of Ferrovial, S.A., since 2018. Mr. Di Leo is a member of the international advisory board of Instituto de Estudios Superiores de la Empresa (IESE Business School) as well as a member of the Deming Center Advisory Board of Columbia Business School. He holds a business administration degree from Ricardo Palma University and a postgraduate degree from Escuela Superior de Administracion de Negocios, both in his native Peru. He is fluent in Spanish, Portuguese, English and Italian.

Summary of Qualifications and Experience:

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Key Contributions to the Board:

Brings perspective on international business issues having lived and held executive positions on four continents

Offers insight regarding technology and sales and marketing issues

Works to ensure customer-focused approach in addressing product and service-related issues


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  PHOTO

Director Since: 2010

Age: 63

Board Committees:
Audit; Governance
and Nominating;
Safety, Environment
and Technology

STEPHEN B. DOBBS

Mr. Dobbs is a former executive of Fluor Corporation, a publicly traded professional services firm providing engineering, procurement, construction, fabrication and modularization, commissioning and maintenance, as well as project management services on a global basis. Mr. Dobbs served as Senior Group President over Fluor's Industrial and Infrastructure Group until his retirement in 2014. In that role, Mr. Dobbs was responsible for a wide diversity of the markets served by Fluor, including infrastructure, telecommunications, mining, operations and maintenance, transportation, life sciences, heavy manufacturing, advanced technology, microelectronics, commercial, institutional, health care, water, and alternative power. Mr. Dobbs served Fluor in numerous U.S.

and international locations including Southern Africa, Europe, and China. He is an industry recognized expert in project finance in Europe and the United States, particularly public private partnerships and private finance initiatives. In 2019, Mr. Dobbs retired from the Board of Directors of Lendlease Corporation Limited, an international property and infrastructure group that is publicly traded in Australia, where he had served on the Board since 2015.

Mr. Dobbs earned his doctorate in engineering from Texas A&M University and holds two undergraduate degrees in nuclear engineering, also from Texas A&M. Until his retirement from Fluor, he served on the World Economic Forum's Global Agenda Council on Geopolitical Risk as well as the Governor's Business Council for the State of Texas. He also served as a director of the U.S. China Business Council.

Summary of Qualifications and Experience:

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Key Contributions to the Board:

Chair of Safety, Environment and Technology Committee

Leverages technical background to provide insight regarding technology matters

Possesses emerging market/international experience from his Fluor career

Adds perspective gained from leading business operations in U.S., Southern Africa, Europe and China

Experience in project finance


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    PHOTO

Director Since: 2008

Age: 71

Board Committees:
Audit; Compensation;
Governance and
Nominating

ROBERT K. HERDMAN—Managing Director, Kalorama Partners LLC

Mr. Herdman has been Managing Director of Kalorama Partners LLC, a Washington, D.C. consulting firm specializing in providing advice regarding corporate governance, risk assessment, crisis management and related matters since 2004. He was the Chief Accountant of the SEC from October 2001 to November 2002 prior to joining Kalorama. Prior to joining the SEC, he was Ernst & Young's Vice Chairman of Professional Practice for its Assurance and Advisory Business Services (AABS) practice in the Americas and the Global Director of AABS Professional Practice for Ernst & Young International. He was the senior Ernst & Young partner responsible for the firm's relationships with the SEC, FASB and AICPA. Since 2011, he has been a member of the Board of Directors of WPX Energy, Inc. and serves on its Compensation Committee. He chaired the Audit Committee of WPX Energy, Inc. through April 2018. In April 2015, he retired from the Board of Directors of HSBC Finance Corporation and HSBC USA Inc. Mr. Herdman had served on the Audit Committees of both companies through April 2013. Mr. Herdman also retired from the Board of Directors of HSBC North America Holdings, Inc. in April 2015 and was past Chairman of both its Audit and Risk Committees.

Summary of Qualifications and Experience:

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Key Contributions to the Board:

Chair of Audit Committee

Provides insight concerning financial and risk management matters

Mentors finance leaders and helps our finance function enhance skills and talent

Actively engaged in our Enterprise Risk Management program

 

  PHOTO

Director Since: 2001

Age: 72

Board Committees:
Executive; Finance;
Governance and
Nominating; Safety,
Environment and
Technology

ALEXIS M. HERMAN—Chairman and Chief Executive Officer, New Ventures, LLC

Ms. Herman serves as Chair and Chief Executive Officer of New Ventures LLC, a corporate consulting company, and has held these positions since 2001. She serves as Chair of Toyota Motor Corporation's North American Diversity Advisory Board and is a member of Toyota's Global Advisory Board. From 1997 to 2001, she served as U.S. Secretary of Labor. She has also served as a director of The Coca Cola Company since 2007, Entergy Corporation since 2003, and MGM Resorts International since 2002. In addition, Ms. Herman is Co-Chair for the Bush Clinton Presidential Leadership Scholars Program and the Senior Vice Chair of the National Urban League. In 2014, Ms. Herman was named to the 2014 National Association of Corporate Directors

(NACD) Directorship 100 in recognition of exemplary leadership in the boardroom and promoting the highest standards of corporate governance.

Summary of Qualifications and Experience:

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Key Contributions to the Board:

Lead Director and Chair of the Governance and Nominating Committee

Brings knowledge of the U.S. government and regulatory process

Offers strategic worldview due to her work with global corporations

Works with management on diversity and talent development initiatives

Creates a culture that fosters open discussion and full Board participation


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  PHOTO

Director Since: 2015

Age: 65

Board Committees:
Compensation;
Finance; Governance
and Nominating

THOMAS J. LYNCH—Chairman, TE Connectivity Ltd.

Mr. Lynch is the Chairman of TE Connectivity Ltd. (formerly Tyco Electronics Ltd.), a global provider of connectivity and sensor solutions, and harsh environment applications. Mr. Lynch served as the Chief Executive Officer of TE Connectivity Ltd. from January 2006 to March 2017 and has served as a member of its board of directors since 2007 and as Chairman of the Board since January 2013. From September 2004 to January 2006, Mr. Lynch was at Tyco International as the President of Tyco Engineered Products & Services, a global manufacturer of industrial valves and controls. Mr. Lynch joined Tyco from Motorola, where he served as Executive Vice President of Motorola, and President and Chief Executive Officer of Motorola's Personal

Communications sector, a leading supplier of cellular handsets. Mr. Lynch has served as a director of Thermo Fisher Scientific Inc. since 2009 and as Lead Director since February 2020. He has also served as a director of Automatic Data Processing, Inc. since 2018. Mr. Lynch serves on the Board of The Franklin Institute and on the Rider University Board of Trustees.

Summary of Qualifications and Experience:

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Key Contributions to the Board:

Chair of Finance Committee

Brings perspective of a sitting Chairman and former CEO of a publicly traded global company

Leverages business and financial background in rendering advice and insight

Identifies and raises strategic considerations for Board consideration

 

  PHOTO

Director Since: 1989

Age: 63

Board Committees:
Audit; Compensation;
Executive;
Governance and
Nominating

WILLIAM I. MILLER—President, The Wallace Foundation

Mr. Miller has served as President of The Wallace Foundation, a national philanthropy with a mission of improving learning and enrichment for disadvantaged children and the vitality of the arts for everyone, since 2011. Mr. Miller was the Chairman of Irwin Management Company, a Columbus, Indiana private investment firm, from 1990 to 2011. Mr. Miller has been a director or trustee of the New Perspective Fund, Inc. and the EuroPacific Growth Fund, Inc. since 1992 and of the New World Fund, Inc. since 1999. All three of the funds are in the same mutual fund family.

Summary of Qualifications and Experience:

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Key Contributions to the Board:

Professional experience in the banking and investment industries

Extensive knowledge of our company, its values and its global operations

Leadership experience in the civic, nonprofit and philanthropic sectors


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  PHOTO

Director Since: 2004

Age: 70

Board Committees:
Audit; Compensation;
Governance and
Nominating

GEORGIA R. NELSON

Prior to her retirement in June 2019, Ms. Nelson was President and CEO of PTI Resources,  LLC, an independent consulting firm, since 2005. Prior to this role, Ms. Nelson retired in 2005 from Edison International, where she had been President of Midwest Generation EME, LLC since 1999 and General Manager of Edison Mission Energy Americas since 2002. Her business responsibilities have included management of regulated and unregulated power operations and a large energy trading subsidiary as well as the construction and operation of power generation projects worldwide. She has had extensive experience in business negotiations, environmental policy matters and human resources. She has served as a director of Ball Corporation since 2006,

TransAlta Corporation since 2014 and Sims Metal Management Limited since 2014. In December 2017, she retired as a director of CH2M Hill Companies Ltd., a privately-held company, where she had served as a director since 2010. She serves on the advisory committee of the Center for Executive Women at Northwestern University. In November 2012, Ms. Nelson was named to the 2012 National Association of Corporate Directors (NACD) Directorship 100 in recognition of exemplary leadership in the boardroom and promoting the highest standards of corporate governance. Ms. Nelson is an NACD Board Fellow.

Summary of Qualifications and Experience:

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Key Contributions to the Board:

Chair of Compensation Committee

Provides perspective based on background in power generation and business

Utilizes expertise in compensation and governance matters to oversee best practices in executive compensation

Possesses human resources and environmental experience

Works outside of regular meetings to support the development of women in leadership roles


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  PHOTO

Director Since: 2017

Age: 56

Board Committees:
Audit; Governance
and Nominating;
Safety, Environment
and Technology

KAREN H. QUINTOS—Chief Customer Officer, Dell Technologies Inc.

Ms. Quintos has served as Chief Customer Officer of Dell Technologies Inc., the world's third largest supplier of personal computers and other computer hardware items, since 2016. In addition, Ms. Quintos leads Dell's global customer strategy and programs as well as Diversity and Inclusion, Corporate Responsibility and Entrepreneurship strategy and programs. From 2010 to 2016, Ms. Quintos served as Senior Vice President and Chief Marketing Officer, Vice President of public sector marketing and North America commercial marketing, and held executive roles in services, support and supply chain management. Karen joined Dell in 2000 from Citigroup where she was Vice President of global operations and technology. Ms. Quintos earned a Master's

degree in marketing and international business from New York University and a B.S. in supply chain management from Pennsylvania State University.

Ms. Quintos is on the board of Lennox International and serves on its Compensation and Human Resources Committee and its Public Policy Committee. She also serves on the board of Susan G. Komen for the Cure, and is founder and executive sponsor of Dell's Women in Action employee resource group. She is on the board of Penn State's Smeal College of Business and a 2014 recipient of its highest honor, the Distinguished Alumni Award.

Summary of Qualifications and Experience:

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Key Contributions to the Board:

Contributes marketing and international perspective

Brings knowledge of global customer strategy and programs

Offers strategic insight in customer services, support and supply chain management

Offers strategic view on diversity and corporate responsibility programs

The table below summarizes key qualifications, skills and attributes most relevant to the decision to nominate the candidates to serve on our Board. A mark indicates a specific area of focus or experience on which the Board relies most. The lack of a mark does not mean the director nominee does not possess that qualification or skill. Each director nominee biography above in this section describes each nominee's qualifications and relevant experience in more detail.

    DIRECTORS     Automotive &
Transportation


  Manufacturing
  Technology/
IT


  Sales/
Marketing


  Government/
Regulatory


  International
  Academics
  Financial

 

 

Robert J. Bernhard

 

 

 

·

 

 

 

·

 

 

 

·

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

·

 

 

 

 

 

 
   
    Franklin R. Chang Diaz               ·       ·                       ·                    
   
    Bruno V. Di Leo                       ·       ·               ·                    
   
    Stephen B. Dobbs       ·       ·       ·                       ·               ·    
   
    Alexis M. Herman               ·                       ·       ·                    
   
    Robert K. Herdman               ·                       ·       ·               ·    
   
    N. Thomas Linebarger       ·       ·       ·       ·               ·               ·    
   
    Thomas J. Lynch               ·       ·                       ·               ·    
   
    William I. Miller               ·                                               ·    
   
    Georgia R. Nelson       ·       ·       ·                       ·                    
   
    Karen H. Quintos                       ·       ·               ·                    
   

 

 

 

 

 

 

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EXECUTIVE
COMPENSATION

NOTE FROM OUR COMPENSATION COMMITTEE

In 2019, Cummins delivered record net income and operating cash flow while continuing to return significant value to our shareholders in the form of dividends and share repurchases. We also delivered first quartile Return on Invested Capital as compared to our peer group.

During the year, the Compensation Committee continued to focus on the following areas:

    Driving alignment of our compensation programs to our business strategy;

    Target setting and risk assessments related to our compensation plans; and

    Remaining abreast of shareholder concerns and best practices in the market.

It is critical we provide competitive and equitable compensation and benefits programs to all Cummins employees. The overarching compensation and benefits philosophies applied to our executives also guide program design for the entire workforce. This consistency in approach ensures market competitiveness while driving a performance culture aligned with the expectations of our stakeholders. Our executive programs are aligned with our business strategy and the financial interests of our stakeholders. We recognize the importance of competitive compensation and benefits programs to attract, retain, and motivate world class leaders and world class employees.

Contained within this Compensation Discussion and Analysis (CD&A) are the details of our compensation programs and specific information related to the compensation of our Named Executive Officers (NEOs). We are confident that our compensation programs truly pay for performance and focus our executives on key areas of achievement as reflected in the Company's 2019 results.

Georgia R. Nelson, CHAIR
Robert K. Herdman
Thomas J. Lynch
William I. Miller

COMPENSATION DISCUSSION AND ANALYSIS

This Compensation Discussion and Analysis, or CD&A, provides detailed information about our executive compensation programs. In this CD&A, we focus on the compensation of the following executive officers, whom we refer to as our "Named Executive Officers" (or NEOs) for 2019:

N. THOMAS LINEBARGER

  Chairman of the Board of Directors and Chief Executive Officer

MARK A. SMITH

  Vice President – Chief Financial Officer

LIVINGSTON L. SATTERTHWAITE

  President and Chief Operating Officer

MARYA M. ROSE

  Vice President – Chief Administrative Officer

TRACY A. EMBREE

  Vice President – President, Distribution Business

PATRICK J. WARD(1)

  Former Vice President – Chief Financial Officer

RICHARD J. FREELAND(2)

  Former President and Chief Operating Officer
(1)
Mr. Ward retired on March 31, 2019.

(2)
Mr. Freeland retired on October 15, 2019.

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EXECUTIVE SUMMARY & BUSINESS OVERVIEW

2019 BUSINESS HIGHLIGHTS*

In 2019, our revenues decreased by 1 percent, compared to 2018, due to a sharp slowdown in demand in the second half of the year in many of our largest markets. Full year revenues in North America increased 3 percent and represented 62 percent of our total revenues while international revenues decreased by 6 percent. Managing effectively through economic cycles is a critical part of delivering long-term value to shareholders. The Company responded quickly to weakening demand in the second half of the year and initiated a number of actions to reduce costs and set the business up for stronger performance when market demand improves. Cash flow from operations generated in 2019 was the strongest on record, which allowed us to reinvest in our business and return record levels of cash to shareholders through dividends and share repurchases. Key business highlights for 2019 include:

Our total net sales were $23.6 billion, 1 percent lower than 2018;

We incurred a $119 million ($90 million after tax) restructuring charge associated with our cost reduction actions in response to the slowdown in our global markets;

Net income attributable to Cummins Inc. was a record $2.3 billion, or $2.4 billion excluding the impact of restructuring. This compares to $2.1 billion in 2018;

Our earnings before interest, income taxes, noncontrolling interests in income of consolidated subsidiaries, depreciation and amortization (EBITDA) was a record $3.6 billion or 15.3 percent of sales; excluding the impact of restructuring, EBITDA was $3.7 billion, or 15.8 percent of sales. This compares to EBITDA of $3.5 billion or 14.6 percent of sales in 2018;

Return on average net assets (ROANA) was 35 percent and return on invested capital (ROIC) was 21 percent excluding the impact of restructuring. This compares to 33 percent and 20 percent in 2018;

We continued our efforts to return value to shareholders in 2019 by increasing our dividend by 15 percent and by repurchasing 8.1 million shares of our Common Stock. In total, we returned a record $2.0 billion of cash to shareholders;

Average annual total shareholder return (TSR) over the three-year period ending in 2019 was 14 percent;

We had record levels of operating cash flow, generating $3.2 billion in 2019.

During 2019, we delivered record earnings and cash flow while advancing our strategy to be the leading global powertrain provider. We continue to embrace and enable the disruptive trends in our industry around electrification, connectivity, fuel cell and hydrogen production technologies and are investing in these areas to take advantage of these opportunities.

In 2019, we acquired fuel cell and hydrogen production technologies via our acquisition of Hydrogenics Corporation;

We invested a record $1 billion in our product portfolio of diesel, natural gas, battery, and fuel cell powertrains and related components;

We remain disciplined as we examine new organic investment, partnership and acquisition opportunities that leverage our capabilities;

We are committed to delivering top quartile returns to shareholders while investing for future growth and managing through economic and market cycles;

*See Appendix A for a reconciliation of GAAP to non-GAAP measures referenced in this section.


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PURPOSE OF OUR EXECUTIVE COMPENSATION PROGRAM

Our long-term success depends on our ability to attract, motivate, focus and retain highly talented individuals who are committed to the Cummins vision, strategy, and corporate culture. To that end, our executive compensation program is designed to link our executives' pay to their individual performance, to Cummins' annual and long-term performance, and to successful execution of Cummins' business strategies. We also use our executive compensation program to encourage high-performing executives to remain with us over the course of their careers.

We believe the compensation packages for our Named Executive Officers reflect their extensive management experience, continued high performance, and exceptional service to Cummins. We also believe our compensation strategies have been effective in attracting executive talent and promoting performance and retention.

COMPENSATION ELEMENTS SUPPORT PAY-FOR-PERFORMANCE POLICY

In 2019, we provided a majority of compensation through arrangements designed to hold our executive officers accountable for Cummins' business results and to reward them for consistently strong corporate performance and the creation of shareholder value. The key elements of our executive compensation program supported this objective.

Compensation Element
  Form of Payment
  Performance Metrics
  Rationale
Base salary   Cash   Individual Performance   Market-based to attract and retain skilled executives. Designed to recognize scope of responsibility, individual performance, and experience.
Annual bonus   Cash   Return on Average Net Assets (ROANA) using EBITDA   Rewards operational performance. ROANA balances growth, profitability, and asset management.
Long-term incentive compensation   Performance cash (34%), Performance shares (33%) and Stock options (33%)   Return on Invested Capital (ROIC), weighted at 80% and EBITDA, weighted at 20% over a three-year period for performance cash and performance shares.   ROIC and EBITDA provide an incentive for profitable growth and correlate well with shareholder value.

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Because we believe the compensation of our most senior executives should be based on Cummins' overall performance, every executive's pay is tied to the same financial metrics and a significant amount of their pay is incentive-based and therefore at risk. In 2019, performance-linked components (annual bonus and long-term incentive compensation) were 87% of the CEO's target total direct compensation opportunity and 76% of the average target total direct compensation opportunity for the other Named Executive Officers. These pay elements were allocated as shown below. Mr. Ward and Mr. Freeland are not included in this analysis due to their retirements in 2019.


TARGET TOTAL DIRECT COMPENSATION MIX – FISCAL YEAR 2019

GRAPHIC

ADVISORY SHAREHOLDER SAY-ON-PAY VOTE

At our 2019 Annual Meeting, after the 2019 executive compensation actions described in this CD&A had taken place, we held an advisory shareholder vote to approve the compensation of our Named Executive Officers. We are gratified that our shareholders voted 92.6% in favor of our executive compensation. In response to this strong vote of shareholder approval, we did not undertake any material changes to our executive compensation programs for 2019 following that vote.       GRAPHIC

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PRINCIPLES OF OUR EXECUTIVE COMPENSATION PROGRAM

We believe the level of compensation received by executives should be closely tied to our corporate financial and stock price performance. This principle is apparent in the design of our executive compensation program and in the specific compensation packages we award. In addition to aligning our executives' pay with performance, we follow several other principles when designing and implementing our executive compensation program.

GRAPHIC

INDEPENDENCE OF COMPENSATION CONSULTANT

For 2019, the Compensation Committee engaged Farient Advisors LLC, or Farient, as its independent compensation consultant to provide input and advice to the Committee. Other than the services provided to the Committee, Farient does not provide any other services to our company. Our Compensation Committee maintains a formal process to ensure the independence of any executive compensation advisor engaged by the Committee, including consideration of all factors relevant to the advisor's independence from management, including those factors specified by the NYSE listing rules. The Compensation Committee assessed the independence of Farient in light of those factors and concluded that Farient is an independent compensation advisor and that its work for the Committee did not raise any conflict of interest.

The Committee oversees the work of the consultant and has final authority to hire or terminate any consultant. The Committee also annually reviews structural safeguards to assure the independence of the consultant,


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conducts an annual formal review of the consultant's performance and is responsible for determining whether, and under what circumstances, the consultant participates in Committee meetings and executive sessions.

EXECUTIVE COMPENSATION ALIGNED WITH PERFORMANCE

The Compensation Committee annually requests its independent compensation consultant, Farient, to evaluate the relationship between our executive compensation and our financial and shareholder return performance. To that end, Farient conducts quantitative analyses to test the alignment of our Chief Executive Officer's pay and Cummins' corporate performance using two different models. One model simulates the pay-for-performance tests relied upon by proxy voting advisory firms; the other tests three-year average performance-adjusted compensation relative to three-year average Total Shareholder Return, or TSR. The Compensation Committee considers these analyses in evaluating whether our Chief Executive Officer's compensation fairly reflects the performance delivered.

We conduct a similar analysis to evaluate the compensation of our Named Executive Officers. The following graphs show the relationship between Cummins' corporate financial and TSR performance and our executive compensation levels over the past five years as measured by (i) average TSR (three-year rolling average, on a dividend-reinvested basis); (ii) ROANA; (iii) return on equity (ROE); and (iv) average annual total compensation for the Named Executive Officers during those years. For consistency with the methodology used in our annual incentive plan, ROANA was calculated in the following graphs using EBIT during 2015-2017 and EBITDA during 2018 and 2019. The graphs do not incorporate the new financial performance measures of ROIC and EBITDA because payouts have not yet been made on the basis of those performance measures.

We believe that our business performance is appropriately reflected in our executive compensation as shown in the graphs below. The general correlation between our historical corporate financial and shareholder return performance and our Named Executive Officers' compensation demonstrates that our executive compensation aligned with the objectives of our program. Mr. Ward and Mr. Freeland are not included in this analysis due to their retirements in 2019.

GRAPHIC

The "average total compensation" values in these graphs reflect the averages of the total compensation values for our currently serving Named Executive Officers as reported in the Summary Compensation Tables of our proxy statements for the years shown in the graphs.

*2017 ROANA figure excludes tax adjustment. 2017, 2018, and 2019 ROE figures exclude tax adjustment. 2019 ROANA and ROE figures exclude restructuring charge.


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EXECUTIVE COMPENSATION ALIGNED WITH THE MARKET

Throughout this CD&A, each reference to the "market" and to our market positioning practices is intended to incorporate the market positioning approach outlined below.

We review our executive compensation program on a regular basis and generally target the median of the market in positioning each individual element of compensation. We consider target compensation to be at the market median if it is within +/-10% of the median level indicated by the benchmarking data.

For 2019, our primary benchmarking reference was a consolidation and integration of market data from companies in the manufacturing industry in the Aon Hewitt Total Compensation Management Executive Survey and the Mercer Benchmark Database Survey. We also considered data from our Custom Peer Group (defined below) regarding pay program design, dilution, and performance. We believe this approach provides an appropriate representation of the market, as applicable to our executives, and, by incorporating multiple sources, we lessen the impact of fluctuations in market data over time.

Our Custom Peer Group is made up of the sixteen public companies shown below. All of these firms fall into at least one of these categories:

customers with a strong presence in one or more of our major markets;

companies that compete directly or indirectly with one or more of Cummins' businesses;

key suppliers of related products; and

diversified industrial companies that compete for investor capital within the Industrial market segment.

The Custom Peer Group companies also are similar to Cummins in size and investor profile and compete with us for customers and talent.

GRAPHIC

In 2019, no changes were made to the peer group.


 

 

 

 

 

 

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EXECUTIVE COMPENSATION BEST PRACTICES

We continually review best practices in the area of executive compensation and incorporate those practices in our executive compensation arrangements.


WHAT WE DO
GRAPHIC   Performance measurement: We set clear financial goals that we believe are challenging yet achievable, meet or exceed competitive standards, and will enhance shareholder value over time.

 

 

Our short- and long-term incentive compensation plans use different measures to ensure our executives focus on both annual and longer-term goals.
GRAPHIC   Compensation program design and pay-for-performance alignment: Our short- and long-term incentive plans are designed to strengthen the tie between individual employee performance and corporate performance.
    All eligible employees participate in a unified short-term plan in which annual bonuses are based on overall Cummins' results. This "One Cummins" structure reinforces that the company's overall success is more important than any individual business; encourages collaboration across our organization; and will likely generate enhanced shareholder returns by encouraging our employees to collectively share in the success of our company.
    We use three forms of long-term incentive compensation (performance cash, performance shares and stock options), each of which has a distinct motivational aspect.
    To further encourage executives to focus on the sustained long-term growth of our company and to aid in retention, long-term incentive awards to our executive officers do not vest until the end of the performance period.
    We cap payouts under our short- and long-term incentive compensation plans at 200% of the target awards.
GRAPHIC   Risk mitigation: We maintain a compensation recoupment, or "clawback," policy in our corporate governance principles providing that, if any of our financial statements must be materially restated due to the fraudulent actions of any officer, our Compensation Committee may direct that we recover all or a portion of any award or any past or future compensation (other than base salary) from such officer with respect to any year affected by such restatement
GRAPHIC   Governance: Our Compensation Committee benefits from the use of an outside, independent compensation consultant.

 

 

The independent compensation consultant helps the Compensation Committee conduct a comprehensive annual assessment of the risk associated with our compensation program.

 

 

We monitor our pay practices on an ongoing basis to ensure they do not encourage excessive risk taking.
GRAPHIC   Other: We require executive officers to maintain prescribed stock ownership levels.

 

 

We prohibit officers from entering into any arrangement that, directly or indirectly, involves the pledge of our securities or other use of our securities as collateral for a loan.

 

 

Benefits under our change in control arrangements with our executive officers are subject to a "double trigger," meaning those benefits are not owed unless there is a change in control and the executive officer's employment is terminated by us without cause or by the executive with good reason.
WHAT WE DON'T DO

GRAPHIC

 

We do not permit backdating or repricing of stock options.

GRAPHIC

 

We do not have separate employment contracts with our executive officers.

GRAPHIC

 

We do not guarantee salary increases, bonuses or equity grants for our executive officers, and we do not provide discretionary bonuses to our Named Executive Officers.

GRAPHIC

 

We will not gross-up excise taxes that may be imposed on payments to our executive officers in connection with a change in control.

GRAPHIC

 

We do not offer significant perquisites.

GRAPHIC

 

We do not permit Officers or Directors to engage in hedging or similar types of transactions with respect to our stock.

GRAPHIC

 

We do not pay dividends or dividend equivalents on unearned performance shares.

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HOW PERFORMANCE MEASURES AND GOALS ARE DETERMINED

The Compensation Committee regularly reviews all elements of our executive compensation program and makes changes it deems appropriate from time to time. Each review includes general comparisons against market data and analysis prepared by Farient, including information on market practices and decision support in the following areas:

Pay strategy and positioning on all elements of compensation;

Annual bonus plan design, including performance measures, performance targets and plan leverage;

Long-term incentive plan strategy and design, including the mix of elements, as well as performance measures, performance targets and plan leverage for the performance share and performance cash components;

Stock ownership guidelines;

Executive perquisites, including personal use of company aircraft; and

Executive benefits and protection policies, including severance practices for officers, supplemental retirement plans, deferred compensation plans and change in control arrangements.

The Compensation Committee establishes performance measures and goals each year that are designed to help achieve our business strategy and objectives. In setting the performance goals for annual and long-term incentive compensation, the Compensation Committee benchmarks against the historical performance of the Custom Peer Group and considers whether Cummins' goals are sufficiently demanding relative to our peers' performance trends. Additionally, the Compensation Committee solicits Farient's assessment regarding the degree of difficulty associated with the incentive plan performance targets in the context of both external analyst expectations for our annual and long-term performance and relative peer performance expectations. The Compensation Committee believes this comprehensive process leads to appropriate performance targets and incentive awards that reflect the creation of shareholder value.

The Compensation Committee has discretion to adjust performance results that reflect significant transactions (such as acquisitions, divestitures, or newly-formed joint ventures) or other unusual items (such as pension plan contributions above required levels, restructuring, or significant tax legislation) if such events were not anticipated at the time performance targets were initially established. In determining the final payout factor for the 2019 Annual Bonus plan and the 2017 - 2019 Long-Term Incentive plan, the following exclusions were made:

We excluded the impact of the Tax Cuts and Jobs Act enacted in 2017 (2017 Tax Legislation) as it had a material impact on the reported results of the Company and was not anticipated at the time performance targets were initially established.

We excluded costs related to restructuring actions implemented in the fourth quarter of 2019 in response to a slowdown in the global markets that was not contemplated at the time the performance goals for these plans were developed. There was no material financial benefit to 2019 performance. The Compensation Committee determined it was appropriate to exclude these costs from the calculation of performance under the plans to avoid providing a deterrent to implementing necessary cost-cutting measures and to ensure that the incentives under the plans continue to be based on operational factors within our executive officers' control. The benefits of the restructuring actions have been factored into the Company's financial and incentive plan targets for 2020.


 

 

 

 

 

 

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2019 Annual Bonus Plan

    Exclusion of $119 million restructuring charges from 2019 EBITDA;

    Exclusion of a $119 million restructuring accrual from 2019 average net assets

2017 - 2019 Long-Term Incentive Plan

    Exclusion of a $777 million charge from 2017 net income and $777 million from 2017 shareholders' equity associated with the impact of the 2017 Tax Legislation;

    Exclusion of a $116 million benefit from 2018 net income and $116 million from 2018 shareholders' equity associated with a lower effective tax rate as a result of the 2017 Tax Legislation;

    Exclusion of a $219 million benefit from 2019 net income and $219 million from 2019 shareholders' equity associated with a lower effective tax rate as a result of the 2017 Tax Legislation;

    Exclusion of $90 million in fourth quarter after tax restructuring charges from 2019 net income and 2019 shareholders' equity

INFORMATION ABOUT OUR NAMED EXECUTIVE OFFICERS

In 2019, the following compensation decisions were approved for our Named Executive Officers as a result of Company performance and pay positioning relative to the market. The Compensation Committee believes the 2019 compensation packages for our NEOs as outlined below are appropriate. The base salaries included in the following tables were in effect July 1st through the remainder of the year. The target bonus values are based on actual salary earned during 2019.

N. Thomas Linebarger, Chairman of the Board of Directors and Chief Executive Officer

Tom Linebarger is the Chairman and CEO of Cummins and is responsible for setting and implementing the business strategy for the organization and has been in the role since January 2012.

  2018   2019     Change

Base salary

  $1,510,000   $1,575,000     4.3%

Target annual bonus

  $2,308,000   $2,468,000     6.9%

Target long-term incentive

  $7,100,000 for the 2018-20 performance period   $8,000,000 for the 2019-21 performance period     12.7%

The Compensation Committee approved the increase to Mr. Linebarger's salary and target long-term incentive in recognition of both his and Cummins' performance. Mr. Linebarger's target annual bonus increased solely as a result of the increase in his base salary.


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Mark A. Smith, Vice President and Chief Financial Officer

Mark Smith is responsible for Cummins' accounting, treasury, tax, internal audit, investor relations, and business analysis and planning functions and has been in the role since March 2019.

 
   
   
   
 
  2018
  2019
  Change

Base salary

  $400,000   $710,000   77.5%

Target annual bonus

  $232,800   $572,500   145.9%

Target long-term incentive

  $700,000 for the 2018-20 performance period   $1,750,000 for the 2019-21 performance period   150%

The Compensation Committee approved the changes to Mr. Smith's compensation in connection with Mr. Smith's appointment to the position of Vice President and Chief Financial Officer to reflect the increased responsibilities associated with that role. The base salary and target annual bonus levels for Mr. Smith shown in the table above for 2019 were effective March 1, 2019.

Livingston L. Satterthwaite, President and Chief Operating Officer

Tony Satterthwaite is responsible for Cummins' daily operations and ensuring that we meet our financial, customer and operating commitments and has been in the role since October 2019.

 
   
   
   
 
  2018
  2019
  Change

Base salary

  $599,000   $740,000   23.5%

Target annual bonus

  $496,825   $547,033   10.1%

Target long-term incentive

  $1,250,000 for the 2018-20 performance period   $2,000,000 for the 2019-21 performance period   60.0%

The base salary and target annual bonus levels for Mr. Satterthwaite shown in the table above for 2019 were effective October 16, 2019. The Committee approved the changes in connection with Mr. Satterthwaite's appointment to the position of President and Chief Operating Officer to reflect the increased responsibilities associated with that role. The target long-term incentive level for Mr. Satterthwaite shown in the table includes an annual award granted effective April 4, 2019 and an additional long-term incentive award granted effective October 16, 2019 in connection with his appointment.

Marya M. Rose, Chief Administrative Officer

Marya Rose is responsible for multiple global functions including government relations, global security, corporate facilities and real estate, communications, ethics and compliance, and Cummins Business Services (CBS) and has been in the role since November 2011.

 
   
   
   
 
  2018
  2019
  Change

Base salary

  $666,000   $690,000   3.6%

Target annual bonus

  $520,000   $542,400   4.3%

Target long-term incentive

  $1,250,000 for the 2018-20 performance period   $1,250,000 for the 2019-21 performance period   No change

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Tracy A. Embree, Vice President and President, Distribution Business

Tracy Embree is responsible for overseeing the Distribution Business, which provides sales, service, and support to customers around the globe and has been in the role since October 2019.

 
   
   
   
 
  2018
  2019
  Change

Base salary

  $630,000   $660,000   4.8%

Target annual bonus

  $492,000   $548,250   11.4%

Target long-term incentive

  $1,100,000 for the 2018-20 performance period   $1,250,000 for the 2019-21 performance period   13.6%

The target long-term incentive level for Ms. Embree shown in the table includes an annual award granted effective April 4, 2019 and an additional long-term incentive award granted effective October 16, 2019 in connection with her appointment to the role of Vice President and President, Distribution Business. The increases in her base salary and target annual bonus were ordinary course merit increases and were not due to the appointment.

Patrick J. Ward, Former Vice President and Chief Financial Officer

Pat Ward retired in March 2019. Prior to his retirement, Mr. Ward was responsible for Cummins' accounting, treasury, tax, internal audit, investor relations, and business analysis and planning functions and had been in the role since May 2008.

 
   
   
   
 
  2018
  2019
  Change

Base salary

  $762,000   $762,000   No change

Target annual bonus

  $699,600   $699,600   No change

Target long-term incentive

  $2,000,000 for the 2018-20 performance period   $0 for the 2019-21 performance period   NA

Because Mr. Ward retired in March 2019, no changes were made to his base salary or annual target bonus. In addition, no long-term incentive was provided for the 2019 - 2021 performance period.

Richard J. Freeland, Former President and Chief Operating Officer

Rich Freeland retired in October 2019. Prior to his retirement, Mr. Freeland was responsible for Cummins' daily operations and ensuring that we meet our financial, customer and operating commitments and had been in the role since July 2014.

 
   
   
   
 
  2018
  2019
  Change

Base salary

  $900,000   $940,000   4.4%

Target annual bonus

  $830,300   $874,000   5.3%

Target long-term incentive

  $3,000,000 for the 2018-20 performance period   $3,000,000 for the 2019-21 performance period   No change

Because Mr. Freeland's retirement date had not been determined at the time of officer compensation planning, Mr. Freeland received both a merit increase and a long-term incentive for the 2019 - 2021 performance period.


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HOW WE DETERMINE COMPENSATION FOR OUR CHIEF EXECUTIVE OFFICER

Each year, our Chief Executive Officer discusses with the Board of Directors his priorities and objectives for Cummins and for the management team. He also provides the Board with his workplan at the start of the year and his assessment of performance at the end of the year. In addition, our independent directors formally review the Chief Executive Officer's performance annually. This review covers both quantitative and qualitative performance matters, including the progress made in implementing Cummins' business strategy and achieving specific long- and short-term business objectives.

The Compensation Committee considers those discussions and the results of the formal review to determine the compensation of our Chief Executive Officer for the coming year. Members of management do not make recommendations regarding the compensation of our Chief Executive Officer. The Compensation Committee Chair presents the Committee's decisions to the Board for its information.

HOW WE DETERMINE COMPENSATION FOR OTHER OFFICERS

Our officer compensation review occurs annually at the February Compensation Committee meeting. This is the first Compensation Committee meeting of the year and provides the earliest opportunity to review and assess individual and corporate performance for the previous year.

This annual review addresses all elements of compensation for each officer, including our Named Executive Officers. The Compensation Committee evaluates each officer's compensation relative to the market median for similar positions and considers internal equity and the experience, tenure, potential and performance of each officer in conjunction with company performance. In addition, the Chief Executive Officer makes recommendations regarding the compensation of the individual Named Executive Officers. Ultimately, final decisions about officers' compensation derive from a subjective assessment of all of these factors. The Compensation Committee believes the 2019 total direct compensation for each of the Named Executive Officers was placed at the appropriate level relative to the competitive market median.

COMPENSATION PROGRAM ELEMENTS

Our executive compensation program consists of three principal elements: base salary, annual bonus opportunities, and long-term incentive compensation opportunities. When considered together, these elements constitute total direct compensation.

Base Salary

We target base salary, on average, at the median of the market for similar executive positions. Some officers' base salaries may vary from the median due to factors such as experience, tenure, potential, performance and internal equity. The Compensation Committee believes that all of the Named Executive Officers' salaries for 2019 were at the appropriate level.

 
   
 
Named Executive Officer
  2019 Base Salary
 

N. Thomas Linebarger

    $1,575,000  

Mark A. Smith

    $710,000  

Livingston L. Satterthwaite

    $740,000  

Marya M. Rose

    $690,000  

Tracy A. Embree

    $660,000  

Patrick J. Ward

    $762,000  

Richard J. Freeland

    $940,000  

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EXECUTIVE COMPENSATION

ANNUAL BONUS

HOW BONUSES ARE CALCULATED

We design annual bonus opportunities for our executives to link their pay to our annual financial performance. The annual bonus payout for each executive is calculated using the following formula:

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The "participation rate" is expressed as a percentage. Participation rates are set so that performance at target would generate an annual bonus that aligns with the median range of the market. The "payout factor" is determined based on Cummins' actual financial performance against our goals for the year. There is no discretionary element to computing annual bonuses.

Our Named Executive Officers' participation rates for 2019, expressed as a percentage of the actual 2019 earnings from their respective 2019 base salaries, were:

 
   
 
Named Executive Officer
  2019 Participation Rate(1)
 

N. Thomas Linebarger

    160%  

Mark A. Smith

    90%  

Livingston L. Satterthwaite

    90%  

Marya M. Rose

    80%  

Tracy A. Embree

    85%  

Patrick J. Ward(2)

    90%  

Richard J. Freeland(2)

    95%  
(1)
Represents the target participation rate in effect at the end of 2019.

(2)
Both Messrs. Ward and Freeland received a bonus payment based on their 2019 eligible earnings.

 

 

 

 

 

 

EXECUTIVE COMPENSATION

 

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ANNUAL BONUS PERFORMANCE MEASURE

In 2019, ROANA was the sole performance measure under our annual bonus program because it appropriately balanced our growth, profitability and the management of our assets, all of which combine to drive our share value. For this purpose, ROANA equals:

ROANA = Earnings Before Interest, Taxes, Depreciation, and Amortization (or EBITDA) ÷ Average Net Assets

EBITDA is defined as Cummins' direct earnings before interest expense, provisions for income taxes, depreciation expense, amortization expense, and non-controlling interests in earnings of consolidated subsidiaries. Average Net Assets is derived from our consolidated balance sheet and excludes debt and related financing accounts, deferred tax amounts, and certain pension and post-retirement liability accounts.

ROANA PERFORMANCE TARGETS

Prior to 2018, we measured ROANA performance using EBIT in our calculation. Since 2018, ROANA performance has been measured using EBITDA to provide a common measure between our short and long-term plans. The target ROANA increased from 30.77% in 2018 to 34.10% in 2019.

This increase is due to the annual operating plan (AOP) projections for 2019. Target ROANA was established by the Compensation Committee after reviewing the AOP. The Compensation Committee seeks to set a challenging yet realistic goal, incorporating previous performance as well as the forecasted opportunities and economic conditions in our markets.

Target ROANA (a 100% payout factor) was the amount required to achieve our AOP. As shown below, the possible payout factors for 2019 ranged from 10% for threshold performance (70% of target ROANA) to a maximum of 200% for superior performance (115% of target ROANA or better). The payout factor changed in increments of 10% for results that fell between threshold and target, or between target and maximum.

 
   
   
   
 
  ROANA Goal
  Goal as
% of Target

  Payout as
% of Target(1)

>Maximum

  39.22%   115%   200%

Target

  34.10%   100%   100%

Threshold

  23.87%   70%   10%

<Threshold

  <23.87%   <70%   0%

EBITDA at target: $3.878 billion

           
(1)
Interpolate for performance between discrete points

Setting the target with the appropriate level of difficulty underscores the importance of achieving or exceeding our AOP performance commitment. This approach requires increasingly difficult targets during economic upturns and realistic goals during cyclical downturns.


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EXECUTIVE COMPENSATION

 

 

2019 ROANA PERFORMANCE AND PAYOUTS

Based on our actual performance during 2019, ROANA was 33.5% (excluding the items noted above under the heading "How Performance Measures and Goals are Determined"). As a result, the payout factor used to calculate the annual bonus for each Named Executive Officer for 2019 was 90%.

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Based on these results, the 2019 annual bonus awards for the Named Executive Officers were as follows:

Named Executive
Officer

  Annual Base
Salary
  X   Participation
Rate
  X   Overall
Payout Factor
  =   2019 Annual
Bonus Award

N. Thomas Linebarger

  $1,542,500       160%       0.9       $2,221,200

Mark A. Smith

  $658,333       86.96%(1)       0.9       $515,250

Livingston L. Satterthwaite

  $634,500       86.21%(2)       0.9       $492,330

Marya M. Rose

  $678,000       80%       0.9       $488,160

Tracy A. Embree

  $645,000       85%       0.9       $493,425

Patrick J. Ward

  $190,500       90%(3)       0.9       $154,305

Richard J. Freeland

  $763,333       95%(4)       0.9       $652,650
(1)
Represents Mr. Smith's pro-rated target participation rate for 2019 (60% target from January 1 – February 28 and 90% target from March 1 to December 31).

(2)
Represents Mr. Satterthwaite's pro-rated target participaion rate for 2019 (85% target from January 1 – October 15 and 90% target from October 16 – December 31).

(3)
Because he was retirement eligible, Mr. Ward received a 2019 bonus based on his eligible earnings prior to his retirement on March 31, 2019.

(4)
Because he was retirement eligible, Mr. Freeland received a 2019 bonus based on his eligible earnings prior to his retirement on October 15, 2019.

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EXECUTIVE COMPENSATION

 

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LONG-TERM INCENTIVE COMPENSATION

FORM OF LONG-TERM INCENTIVE AWARDS

Our long-term incentive compensation program consists of performance cash, performance shares, and stock option awards. The combination of these three long-term incentive vehicles supports our pay-for-performance philosophy, provides appropriate incentives for participants to achieve financial targets, and strengthens the linkage between the economic interests of our Named Executive Officers and our shareholders. In particular, the ten-year term of our stock option grants encourages executives to consider the long-term effects of their decisions on our stock price.

We balance our long-term incentive compensation among these three compensation elements as follows:

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LONG-TERM INCENTIVE PERFORMANCE MEASURES

ROIC AND EBITDA PERFORMANCE TARGETS FOR THE 2019 - 2021 AWARD CYCLE

In 2017 and prior years, we granted performance shares and performance cash based on Return on Equity (ROE) performance. Since the 2018-2020 performance cycle, there have been two metrics: Return on Invested Capital (ROIC), which has an 80% weighting, and earnings before interest, taxes, depreciation, and amortization (EBITDA), which has a 20% weighting. The Compensation Committee felt these metrics were appropriate for the 2019-2021 award cycle as we continue to focus on both growth and delivering strong returns on the capital we invest. Together these metrics have a strong correlation with total shareholder return.

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For the 2019-2021 performance cycle, we set a stable ROIC target at the top quartile of our peers. We expect to continue to assess our goals every year for Compensation Committee review and approval. We will endeavor to maintain a stable target as long as our strategy remains the same in order to help deliver top quartile returns.

The EBITDA performance target was established by the Compensation Committee after reviewing our long-term strategy and financial projections with the intent of setting a challenging yet realistic goal, incorporating previous performance as well as the forecasted opportunities and economic conditions in our markets.


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EXECUTIVE COMPENSATION

ROIC for compensation purposes equals:

ROIC = Average Earnings Before Interest Expense and Noncontrolling Interests after taxes for the 3-year performance period ÷ Average Invested Capital for the 3-year performance period

EBITDA for compensation purposes equals:

EBITDA = Cumulative Earnings Before Interest Expense, Income Taxes, Noncontrolling Interests, Depreciation and Amortization for the 3-year performance period

The table below summarizes the ROIC and EBITDA targets for the 2019 - 2021 award cycle.

 
  ROIC Goal (80%
Weighting)

  ROIC Goal as a
% of Target

  EBITDA Goal (20%
Weighting)

  EBITDA Goal as
% of Target

  ROIC and EBITDA Payouts as
% of Target(1)

<Maximum

  19.50%   130%   $12,642   115%   200%