DEF 14A 1 d826164ddef14a.htm DEF 14A 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.     )

Filed by the Registrant  ☒                             Filed by a Party other than the Registrant  ☐

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  Preliminary Proxy Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material Pursuant to §240.14a-12

ILLINOIS TOOL WORKS 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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SEC 1913 (11-01)

 

 

 


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LOGO

Illinois Tool Works Inc. Notice of 2020 Annual Meeting And Proxy Statement

 


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LOGO

Illinois Tool Works Inc.

Notice of Annual Meeting of Stockholders

 

TIME AND DATE

Friday, May 8, 2020

9:30 A.M. Central Time

  

LOCATION

Illinois Tool Works Inc.

155 Harlem Avenue*

Glenview, Illinois 60025

 

ITEMS

OF BUSINESS

 

1.

To elect the ten director nominees named in this proxy statement for the upcoming year;

 

2.

To ratify the appointment of Deloitte & Touche LLP as ITW’s independent registered public accounting firm for 2020;

 

3.

To hold an advisory vote on executive compensation;

 

4.

To consider a non-binding stockholder proposal to permit stockholders to act by written consent, if properly presented; and

 

5.

To conduct any other business as may be properly brought before the meeting.

RECORD DATE

Only stockholders of record at the close of business on March 9, 2020 are entitled to vote.

ANNUAL REPORT

Our Annual Report on Form 10-K to stockholders for fiscal year 2019 is enclosed if you received proxy materials by mail and is accessible on the Internet at www.proxyvote.com if you received the Notice of Internet Availability of Proxy Materials or previously consented to electronic delivery of proxy materials.

 

By Order of the Board of Directors,
Norman D. Finch Jr.
Secretary

March 27, 2020

*Enter the campus from 150 Waukegan Road at Overlook Drive. Signage will direct you to the meeting location.

 

 

We are monitoring the situation regarding COVID-19 (Coronavirus) closely. If we decide to hold the meeting solely by means of remote communication, we will announce that fact as promptly as practicable and post additional information on our website (www.itw.com). If you plan to attend the meeting in person, please check our website prior to the meeting.

 


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Your Vote is Important

You may vote your shares in one of the following four ways:

 

1. By telephone:    Toll-free by calling 1-800-690-6903;  
2. By Internet:    See the instructions at www.proxyvote.com;  
3. By mail:    If you received these proxy materials by mail, by signing, dating and mailing the enclosed proxy card; or  
4. In person:    Attend our Annual Meeting, where ballots will be provided.  

If you vote by telephone or Internet, you should have your proxy card or Notice of Internet Availability of Proxy Materials, or E-Proxy Notice, in hand when you call or go to the proxy vote website. If you hold your shares through a bank or broker that does not offer telephone or Internet voting, please complete and return your proxy card by mail.

If you plan to attend the meeting, you must be a holder of Illinois Tool Works Inc. shares as of the record date of March 9, 2020, and obtain a registration confirmation (“Ticket”) in advance. Tickets can be printed by accessing Shareholder Meeting Registration at www.proxyvote.com and following the instructions provided. You will need the 16-digit control number located in the box marked by the arrow on your proxy card or Notice of Internet Availability of Proxy Materials. Tickets will be available to registered and beneficial owners and to one guest accompanying each registered and beneficial owner. You must bring your Ticket to the meeting to gain access. Requests for Tickets will be processed in the order in which they are received. Please note that seating is limited and requests for Tickets will be accepted on a first-come, first-served basis.

Whether or not you plan to attend the meeting, please vote as soon as possible. Under New York Stock Exchange rules, your broker will NOT be able to vote your shares on Proposals 1, 3 or 4 unless it receives specific instructions from you. If you hold your shares through a bank or brokerage account, we strongly encourage you to return the voting instruction card to your bank, broker or other holder of record so that your vote is counted.

Avoid escheatment. We have been advised that some states are strictly enforcing unclaimed property laws and requiring shares held in “inactive” accounts to be escheated to the state in which the stockholder was last known to reside. One way you can show that your account is active is to vote your shares.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 8, 2020: The Illinois Tool Works Inc. 2019 Annual Report on Form 10-K, and this 2020 Proxy Statement are available on the Company’s website at www.itw.com under the “Investor Relations” link. Paper copies are available without charge upon written request to the Company’s address above, Attention: Secretary.


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Table of Contents

 

Corporate Governance Highlights

   1

Governance Profile

   1

Composition of Director Nominees

   1

Corporate Social Responsibility

   2

Director Nominees

   3

Proposal 1 – Election of Directors

   4

Board of Directors and Its Committees

   10

Corporate Governance Policies and Practices

   13

Shareholder Engagement

   17

Director Compensation

   18

Ownership of ITW Stock

   20

Section 16(a) Beneficial Ownership Reports

   23

Availability of Annual Report on Form 10-K

   23

Compensation Discussion and Analysis

   24

Executive Overview

   25

Executive Compensation Highlights

   29

How We Make Compensation Decisions

   32

Components of the 2019 Executive Compensation Program

   34

Compensation Governance Practices and Policies

   37

NEO Compensation

   40

Summary Compensation Table

   40

Grants of Plan-Based Awards

   42

Outstanding Equity Awards at Fiscal Year-End 2019

   43

Option Exercises and Stock Vested

   44

Pension Benefits

   44

ITW Retirement Plans

   45

Potential Payments upon Termination

   48

Summary of Termination and Change-in-Control Provisions

   51

Termination and Change-in-Control Payments and Benefits

   52

Compensation Committee Report

   54

Equity Compensation Plan Information

   55

Pay Ratio

   55

Certain Relationships and Related Party Transactions

   57

Audit Committee Report

   58

Proposal 2 – Ratification of the Appointment of Independent Registered Public Accounting Firm

   60

Proposal 3 – Advisory Vote on Executive Compensation

   62

Proposal 4 – Non-Binding Stockholder Proposal to Permit Stockholders to Act by Written Consent

   63

Other Information

   66

Voting Information

   66

Submitting Proxy Proposals and Director Nominations for the 2021 Annual Meeting

   69

Forward-Looking Statements

   70

Appendix A – Categorical Standards for Director Independence

   A-1

Appendix B – GAAP to NON-GAAP Reconciliations

   B-1


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Corporate Governance Highlights

Governance Profile

 

 

Board and Other Governance Information

Annual Election of All Directors

  Yes   Shareholder Engagement Program   Yes

Majority Voting for Directors with Director Resignation Policy

  Yes   Stock Ownership Requirements for Executives and Directors   Yes

Number of Independent Directors Standing for Election

  9   Anti-Hedging, Anti-Short-Sale and Anti-Pledging Policies   Yes

Total Number of Director Nominees

  10   Compensation Recovery/Clawback Policy   Yes

Average Age of Directors Standing for Election

  61.1   Principles of Conduct for Members of the Board of Directors   Yes

Independent Lead Director

  Yes   Poison Pill   No

Regular Executive Sessions of Independent Directors

  Yes   Annual Advisory Approval of Executive Compensation   Yes

Annual Board and Committee Self-Evaluations

  Yes   Stockholder Ability to Call Special Meetings   Yes

Annual Independent Director Evaluation of Chairman and CEO

  Yes   Proxy Access   Yes

Mandatory Retirement Age

  Yes   Simple Majority Vote to Amend Charter and By-Laws   Yes

Risk Oversight by Full Board and Committees

  Yes   Exclusive Venue Requirement   No

 

Composition of Director Nominees

 

 

LOGO  

LOGO

  LOGO  

LOGO

 

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Corporate Social Responsibility

 

Strategy. Our Corporate Social Responsibility (CSR) strategy is built around a framework that is consistent with our core values and decentralized, entrepreneurial culture and is operationalized at the division level. Our CSR framework consists of four key elements:

 

   

Our Governance & Ethics

 

   

Our People

 

   

Our Communities

 

   

Our Environment

Our CSR report, published annually and available on our website (www.itw.com/social-responsibility), contains detailed information about our initiatives and progress in these areas.

Board Oversight. Our Board has an active role in the Company’s overall strategies. It also conducts an annual review of the Company’s corporate governance practices and periodically reviews our CSR strategy. Furthermore, the Board is responsible for overall risk oversight of the Company, which includes certain environmental, social, supply chain and governance matters. To this end, the Board receives periodic updates regarding the Company’s CSR-related initiatives and progress.

Management Commitment. The Company’s management team, subject to oversight by our Board, structures, monitors and adjusts the Company’s CSR efforts in a manner that is consistent with our core values and best serves the interests of the Company and all of its stakeholders. Each year, senior management reviews the long-range plans of our segments and divisions. These plans consider, as appropriate, long-term CSR implications and the ability to meet customer needs related to sustainability and clean technology.

Recent Developments. Consistent with our overarching CSR strategic framework and our ongoing engagement with our shareholders, we have been monitoring the financial materiality framework of the Sustainability Accounting Standards Board (SASB) as a way to assess the financial materiality of environmental, social and governance risks to our Company. In 2019, we utilized the SASB Materiality Map® to review the environmental, social and governance risks identified by SASB for companies in the Industrial Machinery and Goods industry under the SASB’s Sustainable Industry Classification System®. We continue to monitor the SASB framework as it applies to the Company in order to identify any environmental, social and governance risks that may be material to the Company.

In recent years, among other things, we set Diversity & Inclusion goals for global women leaders and U.S. ethnically diverse leaders, implemented an Enterprise Safety Strategy, and continued our support of programs and initiatives to improve access to a high-quality education and workforce/career preparation for youth in under-served communities.

We are committed to operating our business in a way that demonstrates our dedication to global environmental sustainability, including continuous improvement in reducing our impact on the environment. In 2019, we set a target to reduce by 2027 our combined Scope 1 and 2 greenhouse gas emissions per U.S. dollar of operating revenue by 20 percent below 2017 levels.

 

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Director Nominees

 

 

Director Nominee    Age    Director
Since
   Other
Public
Boards
  

2019

Attendance

   Primary Occupation    Committee
Memberships

 

  

 

  

 

  

 

  

 

  

 

  

 

 Daniel J. Brutto

 Independent

   63    2012    1    100%    Retired President of UPS International and Senior Vice President of United Parcel Service, Inc.    Audit, Finance

 Susan Crown

 Independent

   61    1994    1    100%    Chairman & CEO of Owl Creek Partners, LLC    Compensation,

Gov/Nom, Executive
(Chair)

 James W. Griffith

 Independent

   66    2012    1    100%    Retired President and CEO of The Timken Company    Compensation,

Gov/Nom, Executive

 Jay L. Henderson

 Independent

   64    2016    2    100%    Retired Vice Chairman, Client Service of PricewaterhouseCoopers LLP    Audit, Finance

 Richard H. Lenny*

 Independent

   68    2014    2    100%    Non-Executive Chairman of Conagra Brands, Inc.    Audit, Compensation
(Chair), Gov/Nom

 E. Scott Santi

 Chairman of the Board and CEO

 Illinois Tool Works Inc.

   58    2012    1    100%    Chairman & CEO of Illinois Tool Works Inc.    Executive

 David B. Smith, Jr.

 Independent

   53    2009    1    100%    Executive Vice President for Policy & Legal Affairs and General Counsel of Mutual Fund Directors Forum    Audit, Finance (Chair)

 Pamela B. Strobel

 Independent

   67    2008    1    100%    Retired Executive Vice President and Chief Administrative Officer of Exelon Corporation and President of Exelon Business Services Company    Audit (Chair),

Gov/Nom, Executive

 Kevin M. Warren

 Independent

   57    2010    n/a    100%    Chief Marketing Officer, UPS International    Compensation,

Gov/Nom

 Anré D. Williams

 Independent

   54    2010    n/a    100%    Group President, Global Merchant & Network Services, of American Express Company    Compensation,
Finance

*Upon the retirement of James A. Skinner in May 2020, Mr. Lenny will become the Independent Lead Director.

 

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Proposal 1 - Election of Directors

Stockholders are being asked to elect the ten director nominees named in this proxy statement at our Annual Meeting. The individuals listed below have been nominated by the Board of Directors as recommended by the Corporate Governance and Nominating Committee. See “Corporate Governance Policies and Practices” for more information regarding our candidate selection process. Each director will serve until the 2021 Annual Meeting, until a qualified successor director has been elected, or until he or she resigns or is removed.

We will vote your shares as you specify on the proxy card, by telephone, by Internet or by mail. If you do not specify how you want your shares voted, we will vote them “FOR” the election of all the nominees listed below. If unforeseen circumstances (such as death or disability) make it necessary for the Board of Directors to substitute another person for any of the nominees, we will vote your shares “FOR” that other person. The Board of Directors does not anticipate that any nominee will be unable to serve.

Each nominee for director brings a strong and unique background and set of skills to the Board, giving the Board as a whole competence and experience in a variety of areas. Set forth below is biographical information provided by the nominees, as well as a description of the experiences, qualifications, skills and attributes that led the Corporate Governance and Nominating Committee and the Board to conclude that each nominee should serve as a director of the Company.

 

 

LOGO

Daniel J. Brutto

 

Retired President of

UPS International

and Senior Vice

President of United

Parcel Service, Inc.

 

Director since: 2012

 

Age: 63

 

 

Mr. Brutto retired as President of UPS International and Senior Vice President of United Parcel Service, Inc., a global package delivery, supply chain management and freight forwarding company, having served in these capacities from 2008 to 2013. From 2016 to 2017, he served as Executive Chairman of Radial, Inc., a global fulfillment, customer care and omnichannel technology company; from 2015 to 2016 he served as Vice Chairman of eBay Enterprise/Innotrac, the predecessor business to Radial, and prior to 2015 he served as a director of Innotrac. Mr. Brutto had over 38 years of experience at UPS, serving in various areas with increasing levels of responsibility, including global operations, finance, accounting, information systems, mergers & acquisitions, marketing and business development. His service at UPS included President, Global Freight Forwarding and corporate controller. He has served as a director of ITW since 2012 and currently serves as a director of Sysco Corporation, where he serves as Chairman of the Corporate Social Responsibility Committee. He has not served as a director of any other publicly traded company in the last five years. In the past he has served on the board of the US China Business Council, the Guangdong Economic Council and the Turkey Economic Advisory Council. He was also a delegate to the World Economic Forum, Davos Switzerland, from 2009 to 2013.

 

Skills and Qualifications:

 

Mr. Brutto’s significant strategic, operational, and financial leadership experience with a major global company, including the establishment of operations in 35 countries, along with his significant international business experience and leadership in the area of Corporate Social Responsibility, bring valuable perspectives to our Board.

 

4


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LOGO

Susan Crown

 

Executive Committee
Chair

 

Chairman & CEO

of Owl Creek

Partners, LLC

 

Director since: 1994

 

Age: 61

 

Ms. Crown has served as Chairman and CEO of Owl Creek Partners, LLC, a private equity firm, since 2008. She is also the founder of Susan Crown Exchange Inc., a social investment organization. She served two terms as a Fellow of the Yale Corporation, and is currently Chairman of Rush University Medical Center, the Rush System for Health, and a director of The Brookings Institution as well as several other civic and not-for-profit organizations. From 1984 to 2015, Ms. Crown served as Vice President of Henry Crown and Company, a business with diversified investments. She has served as a director of ITW since 1994 and currently serves as a director of Northern Trust Corporation. She has not served as a director of any other publicly traded company in the last five years. Ms. Crown’s experience includes executive experience in diversified manufacturing, management, corporate governance and strategy.

 

Skills and Qualifications:

 

Ms. Crown’s long-standing board service at a global banking and financial institution and her extensive board service and leadership roles with many civic and not-for-profit organizations bring valuable perspectives to our Board.

LOGO

James W. Griffith

 

Retired President &

Chief Executive Officer

of The Timken

Company

 

Director since: 2012

 

Age: 66

 

Mr. Griffith retired as President and Chief Executive Officer of The Timken Company, a manufacturer of bearings, alloy and specialty steels and components, having served in that capacity from 2002 to 2014. From 1999 to 2002, he served as Timken’s President and Chief Operating Officer. Mr. Griffith joined Timken in 1984 and held positions in various functional areas of Timken with increasing levels of responsibility, including purchasing and logistics, manufacturing and international operations. From 1996 to 1999, he led Timken’s automotive business in North America and Timken’s bearing business activities in Asia and Latin America. Mr. Griffith is currently a director of AB Volvo, a commercial transport solutions company, and has served as a director of ITW since 2012. He previously served as a director of The Timken Company and Goodrich Corporation. He has not served as a director of any other publicly traded company in the last five years. He also previously served as a director of the US China Business Council and a number of other industry and not-for-profit organization boards.

 

Skills and Qualifications:

 

Mr. Griffith’s extensive experience as Chief Executive Officer of a global industrial manufacturer, along with his international business and engineering experience, bring valuable perspectives to our Board.

 

5


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LOGO

Jay L. Henderson

 

Retired Vice Chairman,

Client Service

PricewaterhouseCoopers

LLP

 

Director since: 2016

 

Age: 64

 

Mr. Henderson retired as Vice Chairman, Client Service of PricewaterhouseCoopers LLP (PwC), a global professional services firm, in June 2016, having served in that capacity since 2007. He also served as PwC’s Greater Chicago Market Managing Partner from 2003 to 2013 and, prior thereto, Managing Partner of the Cleveland Office. During his career at PwC, Mr. Henderson gained significant broad-based experience working with boards and audit committees of Fortune 500 global organizations across multiple markets and industry sectors. Mr. Henderson has been a Certified Public Accountant since 1977. He has served as a director of ITW since 2016 and currently serves as a director of The J.M. Smucker Company, where he serves as Chairman of the Audit Committee, and Northern Trust Corporation, where he serves as Lead Director and as a member of the Audit, Capital Governance, Compensation and Benefits, Corporate Governance and Executive Committees and previously served on the Business Risk Committee. He has not served as a director of any other publicly traded company in the last five years. Mr. Henderson also has significant expertise as a participating board member of a number of professional, civic and not-for-profit organizations.

 

Skills and Qualifications:

 

Mr. Henderson’s extensive experience in managing and overseeing businesses and working with the boards and audit committees of complex global companies, his other board leadership roles and leadership roles at a major professional services firm, as well as his experience with risk oversight, bring valuable perspectives to our Board.

LOGO

Richard H. Lenny*

 

Compensation

Committee Chair

 

Non-Executive

Chairman of

Conagra Brands, Inc.

 

Director since: 2014

 

Age: 68

 

Mr. Lenny has served as non-executive Chairman of Conagra Brands, Inc. since May 2018. Previously, he served as Chairman of Information Resources, Inc., a privately held producer of market and shopper information, from 2013 to 2018, and senior advisor of Friedman Fleischer & Lowe LLC, a private equity firm, from 2014 to 2016, after serving as an operating partner of that firm. From 2001 through 2007 he served as Chairman, President and Chief Executive Officer of The Hershey Company, a manufacturer, distributor and marketer of candy, snacks and candy-related grocery products. Prior thereto, he served as President, Nabisco Biscuit Company, and President of Pillsbury, North America. He has served as a director of ITW since 2014 and currently serves as a director of Conagra Brands, Inc. and McDonald’s Corporation, and previously served as a director of Discover Financial Services. He has not served as a director of any other publicly traded company in the last five years.

 

Skills and Qualifications:

 

Mr. Lenny’s experience as Chief Executive Officer of a global Fortune 500 company and diverse board experience bring valuable perspectives to our Board.

*Upon the retirement of James A. Skinner in May 2020, Mr. Lenny will become the Independent Lead Director.

 

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LOGO

E. Scott Santi

 

Chairman & CEO of

Illinois Tool Works Inc.

 

Director since: 2012

 

Age: 58

 

Mr. Santi has served as Chairman of ITW since May 2015 and as Chief Executive Officer since November 2012. He served as President and Chief Executive Officer of ITW from November 2012 to May 2015 and as President and Chief Operating Officer from October to November 2012. Prior thereto, he served as Vice Chairman from December 2008 to October 2012 and Executive Vice President from October 2004 to December 2008. Mr. Santi also serves on the boards of numerous civic and not-for-profit organizations. He has served as a director of ITW since November 2012 and currently serves as a director of W.W. Grainger, Inc. He has not served as a director of any other publicly traded company in the last five years.

 

Skills and Qualifications:

 

Mr. Santi’s deep understanding of the Company’s business operations, operating philosophy and culture, his expertise in the application of ITW’s business model, as well as his demonstrated success and proven quality of leadership, bring indispensable perspectives to our Board and strong leadership as Chairman.

LOGO

David B. Smith, Jr.

 

Finance Committee
Chair

 

Executive Vice
President for Policy &
Legal Affairs and

General Counsel of
Mutual Fund Directors
Forum

 

Director since: 2009

 

Age: 53

 

Mr. Smith has served as Executive Vice President for Policy & Legal Affairs and General Counsel of Mutual Fund Directors Forum, a not-for-profit membership organization for independent investment company directors and an advocate on important policy matters, since 2005. From 1996 to 2005, Mr. Smith held several positions with increasing levels of responsibility at the Securities and Exchange Commission, serving as Associate Director, Division of Investment Management, from 2001 to 2005. He has served as a director of ITW since 2009 and currently serves as a director of Northern Trust Corporation, where he serves as the Chairman of the Audit Committee. He has not served as a director of any other publicly traded company in the last five years. Mr. Smith is a nephew of Mr. Harold B. Smith, an emeritus director of ITW.

 

Skills and Qualifications:

 

Mr. Smith’s extensive leadership experience in the finance industry and executive experience with a mutual fund industry organization, along with his legal and regulatory experience, bring valuable perspectives to our Board.

 

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LOGO

Pamela B. Strobel

 

Audit Committee Chair

 

Retired Executive Vice

President and Chief

Administrative Officer

of Exelon Corporation

and President of

Exelon Business

Services Company

 

Director since: 2008

 

Age: 67

 

Ms. Strobel retired as Executive Vice President and Chief Administrative Officer of Exelon Corporation and President of Exelon Business Services Company, an electric and gas utility company, in October 2005, a position she had held since 2003, previously serving as Chairman and Chief Executive Officer of Exelon Energy Delivery from 2000 to 2003. Prior thereto, she served as Executive Vice President of Unicom and its chief subsidiary, ComEd, having joined ComEd as General Counsel in 1993, where her experience included supervision and oversight of legal matters and risk management. Ms. Strobel has served as a director of ITW since 2008 and is currently a director of Domtar Corporation, where she serves as Chair of the Human Resources Committee, and State Farm Mutual Automobile Insurance Company, where she serves as Chair of the Compensation Committee. She has not served as a director of a publicly traded company other than Domtar and ITW in the last five years.

 

Skills and Qualifications:

 

Ms. Strobel’s executive and legal experience with a leading energy provider, experience with risk oversight, human capital management and other board experience bring valuable perspectives to our Board.

LOGO

Kevin M. Warren

 

Chief Marketing Officer
of UPS International

 

Director since: 2010

 

Age: 57

 

Mr. Warren has been Chief Marketing Officer, UPS International, a global package delivery, supply chain management and freight forwarding company, since June 2018. Prior to joining UPS International, he served as the Executive Vice President & Chief Commercial Officer of Xerox Corporation, a global business services, technology and document management company, from January 2017 to May 2018. Mr. Warren had over 34 years of experience at Xerox Corporation, serving in various areas with increasing levels of responsibility, including as President, Commercial Business Group; President, Industrial, Retail and Hospitality Business Group; President of Strategic Growth Initiatives; President, U.S. Client Operations; Chairman, President and Chief Executive Officer of Xerox Canada; Senior Vice President, Acquisition Transition Office; and Senior Vice President, U.S. Eastern Sales, U.S. Solutions Group. He also serves as a director of a number of professional, civic and not-for-profit organizations. Mr. Warren has served as a director of ITW since 2010 and has not served as a director of any other publicly traded company in the last five years.

 

Skills and Qualifications:

 

Mr. Warren’s significant strategic and operational leadership experience with a major global company, along with his significant international experience and commercial acumen, bring valuable perspectives to our Board.

 

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LOGO

Anré D. Williams

 

Group President,

Global Merchant &

Network Services

of American Express

Company

 

Director since: 2010

 

Age: 54

 

Mr. Williams has been Group President, Global Merchant & Network Services, of American Express Company, a global services company, since February 2018 and is a member of American Express’ Executive Committee, which is responsible for developing the company’s strategic direction and determining key policies. He was President, Global Merchant Services & Loyalty Group, from 2015 to 2018; and from 2011 to 2015 he was President, Global Merchant Services. Mr. Williams has over 28 years of experience at American Express, serving in various capacities with increasing levels of responsibility, including President, Global Commercial Card; Executive Vice President, U.S. Commercial Card; Senior Vice President, U.S. Middle Market; Vice President and General Manager, Western Region, Corporate Services, and Vice President, Acquisition and Advertising. Mr. Williams has served as a director of ITW since 2010 and is a former director of Ryerson Inc. Mr. Williams has not served as a director of any other publicly traded company in the last five years.

 

Skills and Qualifications:

 

Mr. Williams’ significant strategic and operational leadership experience with a major global financial services company, along with his global business experience, bring valuable perspectives to our Board.

The Board of Directors recommends a vote “FOR” the election of all of the above nominees.

 

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Board of Directors and Its Committees

 

The Company’s Board of Directors met five times during 2019. In addition to these Board meetings, directors attended meetings of Board committees. Non-employee directors, all of whom are independent, met five times in regularly scheduled executive sessions in conjunction with regular Board meetings. The Company strongly encourages its directors to attend all Board and committee meetings and the Annual Meeting of Stockholders. In 2019, all of the directors attended 100% of the meetings of the Board and the committees on which they served and the Annual Meeting of Stockholders. See “Corporate Governance Highlights — Director Nominees” for more information about meeting attendance.

Role of Chairman and Chief Executive Officer

Pursuant to the Company’s Corporate Governance Guidelines, the Board examines whether the role of chairman and chief executive officer should be combined each time the Board elects a new CEO, and may determine to separate or combine the offices of chairman and CEO at such other times as it deems appropriate. E. Scott Santi was elected President and CEO in November 2012, and the Board decided to separate the roles of CEO and Chairman at that time. Given Mr. Santi’s successful transition into the CEO role and his deep knowledge and understanding of the Company’s business model, operations and culture, the Board determined that he is best positioned to lead the Board in its ongoing oversight of the Company’s operations and strategy. In May 2015, the Board elected Mr. Santi Chairman of the Board and CEO. The Board continues to believe that Mr. Santi is best positioned to lead the Board, given his demonstrated success and quality of leadership.

Strong Independent Lead Director

Since the roles of Chairman and CEO were combined in 2015, the Board has elected a strong independent director as Lead Director. The Board believes that this structure, which calls for a strong, independent and highly experienced lead director with well-defined responsibilities, along with the Company’s experienced and engaged independent directors, provides effective oversight of the Company’s management. In conjunction with the Board’s role in overall strategy and succession planning as described below, our Lead Director actively engages with our Chairman & CEO on such matters. In addition, the Corporate Governance Guidelines state that the lead director will:

 

   

preside at all meetings of the Board at which the chairman is not present, including executive sessions of the independent directors;

 

   

act as a key liaison between the chairman and the independent directors;

 

   

have the authority to call meetings of the independent directors, when necessary;

 

   

approve meeting agendas, schedules and information sent to the Board;

 

   

communicate Board member feedback to the chairman after each Board meeting;

 

   

if requested by major stockholders, ensure that he or she is available for consultation and direct communication; and

 

   

perform such other duties as requested by the Board.

The Board of Directors has standing audit, compensation, corporate governance and nominating, finance, and executive committees. Under the terms of the respective charters, each member of the audit, compensation, and corporate governance and nominating committees must meet applicable New York Stock Exchange (NYSE) and Securities and Exchange Commission (SEC) independence requirements.

 

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Board’s Role in Company Strategy and Executive Succession Planning

The Board has an active role in the Company’s overall strategies. Each year, the Board conducts a comprehensive, in-depth review of the Company’s long-term strategy and annual operating plan and actively monitors and reviews management’s progress in executing both throughout the year. The Board also conducts an annual review of the Company’s corporate governance practices. In addition, throughout the year the Board conducts individual segment strategy reviews with segment leadership. The Board also periodically reviews the Company’s Corporate Social Responsibility (CSR) strategy and receives periodic updates regarding the Company’s CSR-related initiatives and progress.

The Board recognizes that one of its most important duties is to ensure continuity in the Company’s senior leadership by overseeing the development of executive talent and planning for the effective succession of the Company’s CEO and the executive leadership team. In order to ensure that the succession planning and leadership development process supports and enhances ITW’s strategic objectives, the Board regularly consults with the CEO on the Company’s organizational needs, its leadership pipeline and the succession plans for critical leadership positions. On an annual basis, the Board also conducts a detailed review of executive succession plans, in addition to addressing the Company’s talent management initiatives and discussing individuals who are considered potential future senior executives of the Company. Similarly, leadership development, including succession planning, is a top priority of the CEO and the senior executive team.

Board’s Role in Risk Oversight

The Board of Directors is responsible for the overall risk oversight of the Company. The Board has delegated to the Audit Committee the responsibility to review and evaluate the Company’s overall financial and compliance risk policies and practices, including certain environmental, safety and health matters and related policies, has delegated to the Finance Committee the responsibility to review and evaluate the risks relating to financings, capital structure and other treasury functions, and has delegated to the Compensation Committee the responsibility to review and evaluate the risks arising from the Company’s compensation policies and practices. The Compensation Committee also advises management on whether the Company’s compensation policies and practices may have a material adverse effect on the Company.

The Company has identified key business risks of the Company, including, but not limited to, legal/compliance/reputation, controllership/tax, key leader continuity/succession, supply chain integrity/continuity, data security risks and risk of recession and significant external events. The Board has a formal process for continuous review of such risks. Certain risks are reviewed and discussed at least annually, while others are considered on a rotating basis. Company management routinely presents on these risks at meetings of the Company’s Board and Board committees, providing them with an opportunity to discuss the risks and the Company’s risk mitigation processes.

In instances where a particular committee reviews certain risks, that committee reports on those risks to the full Board on a regular basis. The Company believes that because each of these committees is comprised solely of independent directors, the Chairman and CEO of the Company is subject to the risk oversight of independent directors.

The committee descriptions below provide more detail regarding the risk oversight delegated to each committee by the Board.

Audit Committee

The Audit Committee is responsible for the integrity of the Company’s financial statements, compliance with legal and regulatory requirements, the independence and performance of ITW’s independent registered public accounting firm, and the performance of the Company’s internal audit function. In

 

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addition, the Committee is responsible for the oversight and engagement of our independent registered public accounting firm and assists the Board with respect to matters involving and overseeing accounting, financial reporting and internal audit functions. In addition, as required by the Company’s Corporate Governance Guidelines and Audit Committee charter, the Audit Committee annually reviews legal affairs and environmental, safety and health matters that may have a material impact on the Company’s financial statements or the Company’s compliance policies. Finally, the Audit Committee, as requested by the Board of Directors, reviews and evaluates certain of our policies and practices with respect to risk assessment and risk management and steps taken by management to monitor and control such exposures. Additional information on the Audit Committee and its activities is set forth under “Audit Committee Report” below.

Compensation Committee

The Compensation Committee establishes and oversees the Company’s executive compensation philosophy, programs and policies, including ensuring that executive compensation is aligned with Company and individual performance. The Compensation Committee recommends to the other independent directors compensation for the chief executive officer, reviews and approves the chief executive officer’s recommendations regarding the compensation of our other executive officers, and makes recommendations regarding new incentive compensation and equity-based plans or amendments to any existing plans. The Compensation Committee also is responsible for reviewing and evaluating risks arising from our compensation policies and practices and providing input to management on whether such policies and practices may have a material adverse effect on the Company.

Under its charter, the Compensation Committee may retain an independent compensation consultant or other advisors. The Compensation Committee engaged Frederic W. Cook & Co., Inc. (Cook), an independent consultant, as its independent advisor to review the Company’s overall executive compensation program, review the peer group of companies used by the Compensation Committee for comparison purposes and assess our compensation governance process. Based on representations from Cook and executive officers and directors of the Company, the Compensation Committee has determined that Cook and its individual compensation advisor to the committee are independent. See “Compensation Discussion and Analysis — How We Make Compensation Decisions — Role of the Compensation Consultant.”

Additional information on the Compensation Committee, its activities, its relationship with its compensation consultant and the role of management in setting compensation is provided under “Compensation Discussion and Analysis” below.

Corporate Governance and Nominating Committee

The Corporate Governance and Nominating Committee identifies, evaluates and recommends director candidates; develops, administers and recommends corporate governance guidelines; oversees the evaluations of the performance and procedures of the Board and individual directors; makes recommendations as to Board committees and Board size; and makes a recommendation to the Board regarding the Board’s determination of director independence for the Board, the Audit Committee and the Compensation Committee. It is also responsible for identifying qualification criteria for Board members. This committee also oversees and makes recommendations to the independent directors regarding non-employee director compensation. See “Corporate Governance Policies and Practices — Director Candidate Selection Process” below for a description of the director selection process.

Finance Committee

The Finance Committee reviews, evaluates and recommends management’s proposals to the Board relating to the Company’s financings and dividend policy, and reviews and evaluates an annual

 

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summary of the funding and investment status of significant benefit plans sponsored by the Company globally. The Finance Committee also periodically reviews and evaluates the Company’s capital structure and capital allocation strategy as well as risks arising from the Company’s treasury function.

Executive Committee

The Executive Committee may act on behalf of the Board if a matter requires Board action between meetings of the full Board. The Executive Committee’s authority in certain matters is limited by law and our by-laws.

Committee Memberships

The following table shows the committee memberships in 2019 and the number of meetings held by each committee during 2019.

 

Director

 

Audit

Committee

 

Compensation

Committee

 

Corporate

Governance

and Nominating

Committee

 

Finance

Committee

 

Executive

Committee

 

Daniel J. Brutto

 

X

 

X

 

Susan Crown

 

X

 

X

 

Chair

 

James W. Griffith

 

X

 

X

 

X

 

Jay L. Henderson

 

X

 

X

 

Richard H. Lenny

 

X

 

Chair

 

X

 

E. Scott Santi

 

X

 

James A. Skinner

 

X

 

Chair

 

X

 

David B. Smith, Jr.

 

X

 

Chair

 

Pamela B. Strobel

 

Chair

 

X

 

X

 

Kevin M. Warren

 

X

 

X

 

Anré D. Williams

 

X

 

X

 

    

 

Fiscal 2019 meetings

 

4

 

4

 

3

 

2

 

0

 

 

Corporate Governance Policies and Practices

General

One of our core values is integrity, and we have long believed that strong corporate governance is important to assure that the Company is managed for the long-term benefit of its stockholders. Accordingly, we continuously review our corporate governance policies and practices not only for compliance with applicable law, the rules and regulations of the SEC, and the listing standards of the NYSE, but also for strong corporate governance and social responsibility principles and standards of behavior.

 

   

Our Corporate Governance Guidelines provide a framework for the effective governance of the Company and address such matters as Board structure and Board governance and the responsibilities of the independent Lead Director.

 

   

Our Statement of Principles of Conduct sets forth standards of conduct applicable to all employees and directors.

 

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Our Global Anti-Corruption Policy emphasizes the importance of complying with anti-corruption laws of all countries in which ITW and our divisions, subsidiaries, agents, consultants and affiliates operate.

 

   

Our Code of Ethics sets forth standards of ethical dealing, full and fair disclosure and compliance applicable to our CEO, Vice Chairman, CFO, and all key financial personnel.

 

   

Our Hedging/Anti-Pledging Policy for executive officers and directors prohibits hedging the risk of ownership in ITW stock and prohibits pledging of ITW stock to secure payment obligations.

 

   

Our clawback policy provides for the recovery of incentive compensation payments from our senior officers in the event of an accounting restatement (whether or not based on misconduct) due to material noncompliance with financial reporting requirements.

 

   

Our Corporate Social Responsibility (CSR) Report describes our CSR strategy and our commitment to robust governance and ethics, our employees, our communities and the environment and provides information about our progress in these areas.

 

   

Our Modern Slavery and Human Trafficking Statement describes the steps we take to mitigate slavery and human trafficking in our supply chain.

 

   

Our Conflict Minerals Policy requires our suppliers to certify the origin of any tin, tantalum, tungsten and gold used in our products to assure that they are from conflict free sources if they originate within the Democratic Republic of Congo or its adjoining countries.

 

   

Our Supplier Code of Conduct requires our suppliers to adhere to the same standards of conduct set forth in our Statement of Principles of Conduct in all relevant respects and specifically requires adherence to laws against child labor, forced labor, wage and working hours, discrimination, environmental, health & safety and fair dealing.

 

   

Our Supplier Expectations inform our suppliers that they are expected to focus on reducing their environmental impact, give back to their communities, and support sourcing to minority or women-owned business sub-suppliers.

 

   

Our Environmental & Sustainability Policy describes our commitment to global environmental sustainability and the responsibility of all our businesses to align with this commitment.

 

   

Our Human Rights Policy reinforces our commitment to demonstrating respect for human rights at ITW and throughout our supply chain, and it applies to all ITW colleagues and locations worldwide and to others who may act on ITW’s behalf.

 

   

Our Safety Policy stipulates that we strive every day to foster a proactive safety culture through the execution of our Enterprise Strategy, which is based on a philosophy that every accident is preventable and with a shared goal of zero accidents.

 

   

Our Government Affairs statement describes our prohibition against use of Company assets or funds for political purposes.

 

   

Our United Kingdom Tax Policy Document describes our commitment to operate in a tax compliant manner in the different jurisdictions in which we are present.

 

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The Audit, Compensation and Corporate Governance and Nominating Committees each review their Committee charters annually and recommend that the Board of Directors approve any changes. Our website includes the charters of these committees, the Company’s Corporate Governance Guidelines, the Statement of Principles of Conduct (our code of business conduct and ethics for directors, officers and employees), the Global Anti-Corruption Policy, and the Code of Ethics for the Chief Executive Officer and key financial and accounting personnel. These and other governance documents are posted on our website (www.itw.com/investor-relations), and any amendments to or waivers of the Code of Ethics will also be promptly posted. Copies of these documents will be provided, without charge, upon request.

Board Independence

Our Corporate Governance and Nominating Committee conducts an annual review and makes a recommendation to the full Board as to whether each of our directors meets the applicable independence standards of the NYSE. In accordance with the NYSE listing standards, our Board of Directors has adopted categorical standards for director independence, including heightened standards applicable to members of our Audit and Compensation Committees. A copy of the Company’s Categorical Standards for Director Independence is attached as Appendix A. A director will not be considered independent unless the Board of Directors determines that the director has no material relationship with the Company (directly, or as a partner, stockholder or officer of an organization that has a material relationship with the Company).

The Board has determined that each of the current directors, except E. Scott Santi, has no material relationship with the Company other than as a director and is independent within the meaning of the Company’s Categorical Standards for Director Independence and the listing standards of the NYSE. In making its independence determinations, the Board of Directors has broadly considered all relevant facts and circumstances including that: (1) Ms. Crown and Messrs. Henderson and Smith serve as directors of Northern Trust Corporation and its subsidiary, The Northern Trust Company, with which the Company has a commercial banking relationship as described under “Certain Relationships and Related Party Transactions” below; (2) Messrs. Brutto, Griffith, Henderson, Lenny, Skinner and Ms. Strobel serve as directors of companies that have an existing customer or supplier relationship with the Company; (3) Mr. David B. Smith, Jr. is the nephew of Harold B. Smith, emeritus director of the Company; and (4) each of Messrs. Warren and Williams are officers of companies with which we conduct business. The Board has concluded that these relationships are not material and, therefore, do not impair the independence of these directors.

Board Evaluations

The Board of Directors and the Audit, Compensation, and Corporate Governance and Nominating Committees conduct annual self-evaluations that assess the effectiveness, processes, skills, functions and other matters relevant to the Board as a whole or to the particular committee. Results of the evaluations are summarized and discussed at Board and committee meetings. In addition, the Board conducts a peer review evaluation whereby each Board member evaluates the contributions of the other Board members, and each director receives a summary of the results of the peer review regarding himself or herself.

Director Qualifications and Succession Planning

The Corporate Governance and Nominating Committee periodically reviews the skills, experience and characteristics required of Board members in the context of the current make-up of the Board and screens and recommends nominees for director to the full Board. Its assessment includes the skills of Board candidates, such as an understanding of technologies pertinent to the Company’s businesses, manufacturing, marketing, finance, regulation and public policy, international background and experience,

 

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age, diversity and ability to provide strategic insight and direction on the Company’s key strategic initiatives. In addition to skills and experience, Board candidates are considered based upon various criteria, such as their personal integrity and judgment, global business and social perspective, and concern for the long-term interests of our stockholders. Although there is no specific policy regarding Board diversity, racial, ethnic and gender diversity are important factors considered in the director selection process. Of the ten director nominees, two are female and two are African-American men. In addition, directors must have time available to devote to Board activities and to enhance their knowledge of the global manufacturing environment. Accordingly, we seek to attract and retain a diverse board composed of highly qualified directors who have sufficient time to attend to their duties and responsibilities to the Company. After receiving recommendations for nominations from the Corporate Governance and Nominating Committee, the Board nominates or elects candidates for director.

Pursuant to ITW’s Corporate Governance Guidelines, a director may not stand for re-election after his or her 75th birthday, except in rare circumstances approved by the Board. The Committee believes it is important to replace skills that may be lost as directors approach retirement age and to identify skills to supplement existing board experience. The Committee discusses with the full Board its analysis of the characteristics and key attributes for future Board candidates.

Director Candidate Selection Process

The Corporate Governance and Nominating Committee, or other members of the Board of Directors, may identify a need to add new members to the Board of Directors with specific skills or to fill a vacancy on the Board. At that time, the Corporate Governance and Nominating Committee would initiate a search, seeking input from Board members and senior management and, to the extent it deems appropriate, engaging a search firm. An initial qualified candidate or a slate of qualified candidates would be identified and presented to the Committee for its evaluation and approval. The Committee would then seek full Board approval of the selected candidate(s).

Our by-laws permit any stockholder or group of up to 20 stockholders meeting our continuous ownership requirement of 3% or more of our common stock for at least 3 years to nominate a candidate or candidates for election and require us to include such nominees in our proxy statement and form of proxy. All such proxy access nominations must be accompanied by information about the nominating stockholders as well as the nominees and meet the requirements as specified in Article II, Section 12 of the Company’s by-laws. For a description of the process for submitting a director candidate through the use of proxy access, see “Other Information — Submitting Proxy Proposals and Director Nominations for the 2021 Annual Meeting — How do I use proxy access to nominate a director candidate to be included in ITW’s 2021 Proxy Statement?”

Our by-laws also permit stockholders to nominate directors for consideration at an annual meeting of stockholders without requiring that their nominees be included in our proxy statement and form of proxy. The policy of the Corporate Governance and Nominating Committee is to consider such nominations as are properly submitted pursuant to Article II, Section 10 of the Company’s by-laws. Assuming that a properly submitted stockholder recommendation for a director candidate has been received, the Corporate Governance and Nominating Committee will evaluate that candidate by following substantially the same process, and applying substantially the same criteria, as for candidates submitted by other sources, but the Committee has no obligation to recommend that candidate for nomination. For a description of the process for submitting a director candidate without proxy access, see “Other Information — Submitting Proxy Proposals and Director Nominations for the 2021 Annual Meeting — How do I nominate a director candidate who would not be included in ITW’s Proxy Statement?”

Director Election

Our by-laws provide for the election of directors in uncontested elections by majority vote. Under this majority vote standard, each director must be elected by a majority of the votes cast with respect to

 

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that director. For this purpose, a majority of the votes cast means that the number of shares voted “for” a director exceeds the number of shares voted “against” that director. In a contested election, directors will be elected by a plurality of the votes represented in person or by proxy at the meeting. An election is contested if the number of nominees exceeds the number of directors to be elected. Whether an election is contested or not is determined ten days in advance of when we file our definitive proxy statement with the SEC. This year’s election is uncontested, and the majority vote standard will apply.

If a nominee who is serving as a director is not elected at an annual meeting, Delaware law provides that the director would continue to serve on the Board as a “holdover director” until his or her successor is elected. Our Corporate Governance Guidelines, however, require any nominee for director who fails to receive a majority of the votes cast for his or her election to tender his or her resignation. The Corporate Governance and Nominating Committee of the Board will consider the resignation and recommend to the Board whether to accept or reject it. In considering the resignation, the Committee will take into account such factors as any stated reasons why stockholders voted against the election of the director, the length of service and qualifications of the director, the director’s contributions to the Company, and our Corporate Governance Guidelines. The Board will consider the Committee’s recommendation, but no director who failed to receive a majority of the votes cast will participate. We will disclose the results of the Committee’s review within 90 days of such annual meeting. At our 2019 Annual Meeting, each director received a majority of the votes cast for his or her election.

 

Shareholder Engagement

Shareholder Outreach Activities

We believe regular, proactive communications with our shareholders to be in the long-term best interests of the Company. Our investor communications and outreach include annual investor day meetings, quarterly conference calls, investor conferences and analyst meetings, some of which are hosted at ITW facilities. These meetings provide a forum to engage with our shareholders on topics including strategy, financial performance, risk management, talent development, compensation and corporate governance. Our Chairman and Chief Executive Officer, Vice Chairman, and/or Senior Vice President and Chief Financial Officer hosted numerous in-person meetings throughout 2019 on these topics and sought valuable feedback from our shareholders.

Additionally, we regularly engage with our largest investors regarding governance topics, including Corporate Social Responsibility (CSR), shareholder proposals and any other topics of interest to our investors, and we share feedback we receive from our investors with our Board. We have received valuable inputs from our investors related to our recently updated CSR strategy, as disclosed in our 2018 CSR Report. We also received supportive feedback regarding our recently announced greenhouse gas emissions intensity reduction target. Consistent with our overarching CSR strategic framework and our ongoing engagement with our shareholders, we have been monitoring the financial materiality framework of the Sustainability Accounting Standards Board (SASB) as a way to assess the financial materiality of environmental, social and governance risks to our Company. In 2019, we utilized the SASB Materiality Map® to review the environmental, social and governance risks identified by SASB for companies in the Industrial Machinery and Goods industry under the SASB’s Sustainable Industry Classification System®. We continue to monitor the SASB framework as it applies to the Company in order to identify any environmental, social and governance risks that may be material to the Company.

As part of our annual investor outreach, early this year we offered the opportunity to holders of approximately 56% of our shares, represented by 26 investors, to engage with us regarding governance

 

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related matters, the written consent shareholder proposal, and any other topics they wished to discuss. Nine investors, holding in the aggregate approximately 23% of our shares, engaged with us by telephone. Others indicated that they had no questions and did not feel a call was needed. Overall, the discussions were very positive, with investors expressing support for the Company’s current governance practices and CSR progress.

How to Communicate with Our Directors

Shareholders and other interested parties may communicate with any of our directors, including our independent Lead Director, or with the independent directors as a group by sending an e-mail to independentdirectors@itw.com or by writing to the independent directors as a group or to any of our directors c/o Illinois Tool Works Inc., 155 Harlem Avenue, Glenview, IL 60025, Attention: Secretary, with a designation on the outside of the envelope as a “Board Communication.” Relevant communications will be forwarded by the Secretary to the appropriate directors depending on the facts and circumstances outlined in the communication.

Director Compensation

 

Our non-employee directors receive retainer-only compensation with no fees for attending meetings, which is an expected part of Board service. Our committee chairs and Lead Director receive additional retainers for their service in these capacities, and all Board members receive an annual equity grant based on a fixed-value amount with immediate vesting that avoids entrenchment. Our directors’ compensation is compared to that of the same peer group of companies used for executive compensation comparisons.

The Corporate Governance and Nominating Committee oversees and makes recommendations to the Board regarding non-employee director compensation based on comparisons of financial performance and median compensation levels of our peer group. Peer group directors’ compensation data is prepared by Frederic W. Cook & Co., Inc., the independent compensation consulting firm that advises the Compensation Committee.

Annual Fees

The following table shows the non-employee director compensation for 2019. Non-employee directors were given the opportunity to elect to receive all or a portion of their annual cash retainer, including chair fees, in an equivalent value of ITW common stock pursuant to our 2015 Long-Term Incentive Plan. The number of ITW shares to be issued to a director is determined by dividing the dollar amount of the fee subject to the election by the fair market value of ITW common stock on the date the fee otherwise would have been paid in cash.

 

 

Description

 

  

Amount        

 

   

Annual Retainer

 

   $135,000

 

   

Annual Committee Chair/Lead Director Retainers:

    
   

•   Audit Committee

   $  25,000
   

•   Compensation Committee

   $  20,000
   

•   Corporate Governance & Nominating and Finance Committees

   $  15,000
   

•   Executive Committee

   $    5,000

 

   

•   Lead Director

 

   $  35,000
   

Annual Stock Grant

 

   $145,000

 

 

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Directors’ Deferred Fee Plan

Non-employee directors can defer receipt of all or a portion of their annual cash retainer, including chair/lead director fees, and/or stock grant until retirement or resignation. Deferred cash amounts are credited with interest quarterly at 120% of the applicable federal long-term rate for the quarter. Cash fees may be deferred as cash or ITW common stock. If a director elects to defer receipt of any ITW common stock to be received in lieu of a cash payment and/or any portion of his or her stock grant, the deferred shares are credited as stock units to an account in the director’s name. The account receives share-equivalent credit for cash dividends and is adjusted for stock dividends, splits, combinations or other changes in ITW common stock upon retirement, resignation or a corporate change (as defined in our 2015 Long-Term Incentive Plan), with any fractional shares paid in cash.

ITW Common Stock Grant

The Company grants stock to its non-employee directors under our 2015 Long-Term Incentive Plan, which links this element of compensation to long-term performance. Under our director compensation program, non-employee directors serving in 2019 received an annual stock grant equivalent in value to approximately $145,000.

Director Compensation in Fiscal Year 2019

The following table summarizes the compensation for our non-employee directors who served during 2019.

 

Name

 

  

Cash Fees

Paid or

Deferred

($)(1)

 

  

Stock

Awards Issued

or Deferred

($)(3)

 

  

Total

($)

 

Daniel J. Brutto

           135,000            144,975        279,975

Susan Crown

       140,000        144,975 (4)        284,975

James W. Griffith

       135,000 (2)        144,975 (4)        279,975

Jay L. Henderson

       135,000        144,975        279,975

Richard H. Lenny

       155,000        144,975 (4)        299,975

James A. Skinner

       183,750 (2)        144,975 (4)        328,725

David B. Smith, Jr.

       150,000        144,975        294,975

Pamela B. Strobel

       158,750        144,975 (4)        303,725

Kevin M. Warren

       135,000 (2)        144,975 (4)        279,975

Anré D. Williams

 

      

 

135,000

 

 

      

 

144,975

 

 

      

 

279,975

 

 

 

(1)

Cash fees include the $135,000 annual retainer, Lead Director fee and committee chair fees, as applicable.

 

(2)

The following directors elected to convert some or all cash fees earned in 2019 into shares of ITW common stock and to defer receipt of those shares:

Footnote 2 Table

 

Name

 

  

Fees Deferred

in 2019

 

    

Number of Shares
Deferred in 2019

 

James W. Griffith

   $         135,000         883

James A. Skinner

   $ 183,750      1,201

Kevin M. Warren

 

   $

 

13,500

 

 

 

        88

 

 

(3)

Each director serving in 2019 received an annual stock grant of 921 shares equivalent in value to approximately $145,000.

 

(4)

These directors elected to defer receipt of their entire stock grant.

 

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Ownership of ITW Stock

Directors and Executive Officers

The following table shows the amount of ITW common stock beneficially owned by each director, each named executive officer, and all directors and executive officers as a group as of December 31, 2019, except as otherwise noted. The “named executive officers” as shown in the table are our Chief Executive Officer, our Chief Financial Officer, and the next three most highly-compensated executive officers who were serving at the end of the last fiscal year (based on total compensation, less the increase in pension value and nonqualified deferred compensation earnings). The “percent of class” calculation is based on 319,791,684 shares of ITW common stock outstanding as of December 31, 2019. Beneficial ownership is a technical term broadly defined by the SEC to mean more than ownership in the usual sense. In general, beneficial ownership includes any shares a director or executive officer can vote or transfer and stock options, restricted stock units and performance share units that are currently vested or that become vested within 60 days. Except as otherwise noted, the stockholders named in this table have sole voting and investment power for all shares shown as beneficially owned by them.

The number of the directors’ phantom stock units disclosed in the table represents an equivalent number of shares of ITW common stock as of December 31, 2019. Because the granting of phantom stock units was discontinued in May 2012, Messrs. Henderson and Lenny, who joined the Board after that date, were not awarded phantom stock units upon joining the Board. Phantom stock units are not transferable and have no voting rights. The units are payable in cash and are not included in the “percent of class” calculation.

 

Beneficial Owner   

Shares of
Common Stock

Beneficially Owned

  Phantom
Stock Units
  

Percent  

of Class  

   

Directors (other than Executive Officers)

               

Daniel J. Brutto

       16,381 (1)           1,195        *  
   

Susan Crown

       58,795 (2)           6,255        *  
   

James W. Griffith

       15,392 (3)           1,195        *  
   

Jay L. Henderson

       7,068              *  
   

Richard H. Lenny

       12,801 (4)              *  
   

James A. Skinner

       52,754 (5)           2,792        *  
   

David B. Smith, Jr.

       131,817 (6)           1,270        *  
   

Pamela B. Strobel

       33,872 (7)           1,340        *  
   

Kevin M. Warren

       13,998 (8)           1,245        *  
   

Anré D. Williams

       10,415           1,245        *  
   

Named Executive Officers

               
   

E. Scott Santi

       1,164,584 (9)              *  
   

Michael M. Larsen

       164,914 (10)              *  
   

Christopher A. O’Herlihy

       192,157 (11)              *  
   

Steven L. Martindale

       224,258 (12)              *  
   

John R. Hartnett

       90,250 (13)              *  
   

Directors and Executive Officers as a Group (20 Persons)

      

 

2,511,754

 

(14)

 

     

 

    16,537

 

 

      

 

*  

 

 

*Less than 1%

 

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(1)

Includes 4,839 deferred shares.

(2)

Includes (a) 4,000 shares owned by Ms. Crown’s spouse, which were pledged to secure bank borrowings prior to April 1, 2013, and as to which she disclaims beneficial ownership; (b) 4,000 shares held in trusts of which Ms. Crown’s children are beneficiaries, as to which she disclaims beneficial ownership; and (c) 13,168 deferred shares.

(3)

Includes 7,781 deferred shares.

(4)

Includes (a) 10,015 deferred shares; (b) 8 shares owned jointly with Mr. Lenny’s spouse; and (c) 1,000 shares as to which Mr. Lenny has shared voting and investment power, which shares are held as tenants in common with his spouse through trusts.

(5)

Includes 40,396 deferred shares.

(6)

Includes (a) 95,901 shares owned jointly with Mr. Smith’s spouse, all of which were pledged to secure lines of credit prior to April 1, 2013; and (b) 15,517 shares held in trusts of which Mr. Smith’s children are beneficiaries, as to which he disclaims beneficial ownership.

(7)

Includes 24,867 deferred shares.

(8)

Includes (a) 6,510 deferred shares; and (b) 4,440 shares beneficially owned by Mr. Warren’s spouse.

(9)

Includes (a) 3,885 shares allocated to Mr. Santi’s account in the ITW Savings and Investment Plan; (b) 1,021,780 shares covered by options exercisable within 60 days; and (c) 21,884 performance share units which vest within 60 days.

(10)

Includes (a) 134,208 shares covered by options exercisable within 60 days; and (b) 5,732 performance share units which vest within 60 days.

(11)

Includes (a) 1,712 shares allocated to Mr. O’Herlihy’s account in the ITW Savings and Investment Plan; (b) 156,652 shares covered by options exercisable within 60 days; and (c) 5,420 performance share units which vest within 60 days.

(12)

Includes (a) 185,834 shares covered by options exercisable within 60 days; and (b) 2,500 performance share units which vest within 60 days.

(13)

Includes (a) 70,273 shares covered by options exercisable within 60 days; and (b) 2,605 performance share units which vest within 60 days.

(14)

Includes (a) 1,840,045 shares covered by options exercisable within 60 days; (b) 53,602 restricted stock units and performance share units which vest within 60 days; and (c) 99,901 shares, which were pledged as security prior to April 1, 2013.

 

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Other Principal Stockholders

The following table shows, as of December 31, 2019, the only stockholders that we know to be beneficial owners of more than 5% of ITW common stock. The “percent of class” calculation is based on 319,791,684 shares of ITW common stock outstanding as of December 31, 2019. See “Certain Relationships and Related Party Transactions” for a description of the commercial banking services provided by The Northern Trust Company and its subsidiaries to the Company and the amount paid by the Company for those services.

 

Name and Address of

Beneficial Owner

 

 

Shares of Common Stock
Beneficially Owned

 

   

Percent
of Class

 

 

The Vanguard Group

    26,562,572(1)       8.3%  

100 Vanguard Blvd.

       

Malvern, PA 19355

 

               

Briar Hall Management LLC

    25,842,147(2)       8.0%  

511 Union Street, Suite 735

       

Nashville, TN 37219

 

               

State Farm Mutual Automobile Insurance Company

    21,939,714(3)       6.9%  

Investment Dept. E-9

       

One State Farm Plaza

       

Bloomington, IL 61710

 

               

BlackRock, Inc.

    20,503,805(4)       6.4%  

55 East 52nd Street

       

New York, NY 10055

 

               

The Northern Trust Company

    19,447,266(5)       6.1%  

50 South LaSalle Street

       

Chicago, IL 60603

 

               

 

  (1)

The Vanguard Group has sole voting power with respect to 471,366 shares, shared voting power with respect to 88,350 shares, sole investment power with respect to 26,032,825 shares and shared investment power with respect to 529,747 shares. The information above regarding number of shares beneficially owned was provided in a Schedule 13G/A filed with the SEC on February 12, 2020.

  (2)

Briar Hall Management LLC (Briar Hall) holds certain ITW shares owned by the Smith family, founders of ITW. Briar Hall has sole voting and investment power with respect to 24,709,147 shares and shared voting and investment power with respect to 1,133,000 shares. The information above regarding the number of shares beneficially owned was provided in a Schedule 13G/A filed with the SEC on January 16, 2020.

  (3)

State Farm Mutual Automobile Insurance Company and its affiliates have sole voting and investment power with respect to 21,813,000 shares and shared voting and investment power with respect to 126,714 shares. The information above regarding number of shares beneficially owned was provided in a Schedule 13G filed with the SEC on January 28, 2020.

  (4)

BlackRock, Inc. has sole voting power with respect to 17,309,525 shares and sole investment power with respect to 20,503,805 shares. The information above regarding number of shares beneficially owned was provided in a Schedule 13G/A filed with the SEC on February 5, 2020.

  (5)

The Northern Trust Company and its affiliates act as sole fiduciary or co-fiduciary of trusts and other fiduciary accounts that own an aggregate of 19,447,266 shares. They have sole voting power with respect to 7,161,095 shares and shared voting power with respect to 11,392,800 shares. They have sole investment power with respect to 2,981,667 shares and shared investment power with respect to 11,634,569 shares. The information above regarding number of shares beneficially owned was provided in a Schedule 13G/A filed with the SEC on February 12, 2020.

 

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Section 16(a) Beneficial Ownership Reports

Delinquent Section 16(a) Reports

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that the Company’s executive officers, directors and greater than 10% stockholders file reports of ownership and changes of ownership of ITW common stock with the SEC and the NYSE. Based on a review of copies of these reports provided to us during fiscal 2019 and written representations from executive officers and directors, we believe that all filing requirements were timely met during 2019, except that due to a change in Mr. Henderson’s SEC filing codes of which he was unaware, one Form 4 (reporting his annual stock grant) was rejected by the SEC’s filing system on the filing due date, and despite the best efforts of the Company and Mr. Henderson to file the form on the due date, we were unable to obtain the new codes until the next day, upon which the form was filed immediately.

 

Availability of Annual Report on Form 10-K

The Company is providing its Annual Report on Form 10-K to stockholders who receive this proxy statement. The Company will provide copies of this report to brokers, dealers, banks, voting trustees and their nominees for the benefit of their beneficial owners of record. Additional copies of this proxy statement and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 are available without charge upon written request to Illinois Tool Works Inc., 155 Harlem Avenue, Glenview, IL, 60025, Attention: Secretary. You may also review the Company’s SEC filings by visiting the Company’s website at www.itw.com/investor-relations.

 

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Compensation Discussion and Analysis

The Compensation Discussion and Analysis provides detailed information about our 2019 compensation programs, policies and practices, as well as the principles and philosophy utilized by the Compensation Committee (the “Committee”) regarding these programs for the named executive officers (NEOs) in the Summary Compensation Table. For 2019, our NEOs are:

 

   

E. Scott Santi, Chairman & Chief Executive Officer

   

Christopher A. O’Herlihy, Vice Chairman

   

Michael M. Larsen, Senior Vice President & Chief Financial Officer

   

Steven L. Martindale, Executive Vice President

   

John R. Hartnett, Executive Vice President

Executive Compensation Table of Contents

 

 

Certain Defined Terms

 

  After-Tax ROIC – After-Tax Return on
         Average Invested Capital*
  Cook – Frederic W. Cook & Co., Inc.
  EIP – Annual Executive Incentive Plan
  EPS – Earnings Per Share
  NEO – Named Executive Officer
  PSU – Performance Share Unit
  TSR – Total Shareholder Return
 

 

*See Appendix B for reconciliation of GAAP to non-GAAP measures.

 

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Table of Contents

Executive Overview

Our Business Model

 

ITW is a global industrial manufacturing company comprised of seven industry leading segments. In late 2012, we launched our Enterprise Strategy with the explicit goal of positioning ITW to deliver solid growth with best-in-class margins and returns by focusing the entire Company on utilizing our highly differentiated and proprietary ITW Business Model to its full potential.

 

The ITW Business Model is the core source of our competitive advantage as a company. It drives our ability to win with customers and deliver differentiated returns for our shareholders. It is a powerful and proprietary set of strategic, operational, and cultural practices that have been in a state of continual development and evolution inside the Company for over 30 years.

   LOGO

Our Long-Term Enterprise Strategy

In launching our long-term Enterprise Strategy, we undertook a complete review of our performance and began executing a multi-step approach to shift our primary growth engine to organic revenue growth. Key initiatives of our Enterprise Strategy included portfolio realignment, business structure simplification, strategic sourcing, and diligent re-application of ITW’s 80/20 Front-to-Back process to optimize our segments for growth.

Since implementing our Enterprise Strategy in 2012, we have increased ITW’s operating margin from 15.9 percent to 24.1 percent and After-Tax Return on Average Invested Capital (After-Tax ROIC) from 14.5 percent to 28.7 percent. Over this same period, we have grown Earnings Per Share (EPS) by a compound annual growth rate of 13 percent, and the Company’s market capitalization has more than doubled.

 

 

LOGO    LOGO

 

LOGO

  

 

LOGO

 

*

As reported in the 2012 Annual Report on Form 10-K.

**

After-Tax ROIC and 2012 adjusted EPS are non-GAAP measures. See Appendix B for information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures.

***

As of January 1, 2012 and December 31, 2019.

 

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In addition, since 2012, we have delivered total returns to our stockholders of 246 percent versus 166 percent for our proxy peer group and 162 percent for the S&P 500.

 

 

LOGO

 

 

  *   TSR for the Company’s peer group is calculated using a simple average. Although Fortive was added to the Company’s peer group in 2017, it was excluded from the calculation of TSR due to its spin-off from Danaher in 2016.

In December 2018, the Company reaffirmed its commitment to the Enterprise Strategy’s objectives and updated its long-term goals through 2023 to achieve full potential performance. The performance objectives of our executive compensation plans, both annual and long-term, are closely aligned with these goals.

ITW’s 2023 Annual Performance Targets

LOGO

ITW Delivers Solid Progress in 2019 on Our Path to Full Potential Performance

In a challenging industrial demand environment during 2019, we executed very well on the objectives of the Enterprise Strategy within our control and continued to make meaningful progress on our path to full potential performance. The combination of our proprietary and powerful ITW Business Model, diversified high-quality business portfolio, and diligent execution continue to position us to deliver resilient financial performance over the long term.

The Company achieved record EPS of $7.74, up 2 percent from 2018, and delivered the following performance in 2019:

 

   

Record After-Tax ROIC of 28.7 percent (up 50 basis points)*

 

   

Free Cash Flow increased 9 percent, 106 percent of net income

 

   

Operating Margin of 24.1 percent (24.4 percent excluding 30 basis points of higher restructuring expense)

 

   

Full year revenue of $14.1 billion, with organic revenue down 1.9 percent

 

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We continued to generate strong cash flow in 2019 which, in alignment with our disciplined approach to capital allocation, was reinvested in our portfolio to support our segments’ ongoing execution to reach full potential performance. We also returned $2.8 billion to shareholders, including a 7 percent dividend increase.

 

LOGO    LOGO

 

LOGO

  

 

LOGO

 

 

*

After-Tax ROIC, 2017 adjusted EPS, and 2017 adjusted operating margin are non-GAAP measures. See Appendix B for information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures.

How We Align Executive Compensation with the Enterprise Strategy

Our Board of Directors and Compensation Committee are responsible for aligning executive incentives with the Company’s strategy and the best interests of our stockholders. The Board believes that the Company has a strong track record of thoughtful and diligent governance and execution with respect to aligning executive incentives, as evidenced by our stockholders’ overwhelmingly favorable support for our annual advisory vote on executive compensation (exceeding 95 percent over the past three years).

The Compensation Committee uses our long-term Enterprise Strategy as a framework to guide our executive compensation decisions. Our programs are designed to be highly performance-oriented, with rigorous financial goals to reward our executives for best-in-class performance. We regularly review our annual and long-term incentive plan metrics to ensure ongoing alignment with the strategy’s initiatives and performance objectives.

We link 50 percent of our executives’ long-term incentive opportunity to performance awards consisting of cash and share-based units, with three rigorous performance goals: three-year average (i) Operating Margin, (ii) After-Tax ROIC, and (iii) EPS growth. The remaining 50 percent of our long-term incentive opportunity are stock options that only provide compensation value as our stock price increases. Notably, we do not provide any time-vested full value equity awards (i.e. restricted stock units) to our NEOs.

 

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Table of Contents

The following table shows the percent of average incentive pay for our NEOs tied to each of the financial metrics in our annual and long-term incentive plans for 2019:

 

    

Performance Metric

 

  

Percent of Overall
Incentive Opportunity

 

 
Annual  

Organic Revenue Growth

 

     13.6%            
   

Operating Income Growth

 

     20.4%            
Long-Term  

Operating Margin

 

     22.0%            
 

After-Tax ROIC

 

     22.0%            
 

EPS Growth

 

     22.0%            

ITW’s Focus on Performance-Based Compensation in 2019

Variable pay makes up a substantial portion of CEO and NEO compensation, as illustrated in the graph below. We believe that the mix of incentives in our executive compensation plans continues to support the achievement of the current phase of our strategy and, as such, our 2019 short-term and long-term incentive plan designs remained unchanged from 2018.

 

LOGO   LOGO

Note: The charts above reflect total target compensation, which is the sum of base salary, target EIP and the grant date fair value of long-term cash and equity incentives for 2019.

The metrics in our annual and long-term incentive plans are designed to reward superior Company, business segment, and individual performance. The following table shows the financial performance metrics for the NEOs used in the Company’s 2019 EIP and 2019-2021 Performance Share Units (PSUs) and Performance Cash awards granted under the long-term incentive plan.

 

Plan

 

 

Performance Measure

 

  

Weight

 

 
2019 Executive Incentive Plan (EIP)   Organic Revenue Growth      40
 

Operating Income Growth

 

    

 

60

 

 

2019-2021 Performance Share Units & Performance Cash   Operating Margin      33.33
  After-Tax ROIC      33.33
 

EPS Growth

 

    

 

33.33

 

 

 

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ITW 5-Year CEO Pay Versus Cumulative TSR Comparison

Each component of the Company’s compensation structure plays an integral role in motivating our executives to maximize ITW’s long-term performance potential. More than 77 percent of the CEO’s compensation is tied to the successful achievement of the Enterprise Strategy’s long-term performance objectives. The following table shows total CEO pay relative to the Company’s cumulative TSR performance over the last 5 years.

 

LOGO

 Notes:

  -   CEO Pay represents Mr. Santi’s compensation levels based upon his total compensation as reported in the Summary Compensation Table, except that his stock options are valued using Institutional Shareholder Services (ISS) methodology.
  -   Indexed TSR line assumes $100 invested on 12/31/2014 in ITW stock.

Executive Compensation Highlights

 

Compensation Philosophy

 

   
Philosophy   Key Components

 

Our executive compensation philosophy is designed to deliver competitive total compensation upon the achievement of our strategy objectives, which will attract, motivate and retain leaders who drive the creation of long-term stockholder value.

 

 

Target total compensation is based on the median of our peer group and relevant external market data. Actual compensation is determined by achievement of results based on our goals aligned with ITW’s strategy.

 

Individual executive compensation is then established based on an executive’s scope of responsibility, impact on profitable growth, individual performance and breadth of experience.

 

 

 

Pay-for-performance through short- and long-term incentives links compensation to Company and business segment performance. This “pay-at-risk” aligns executive and stockholder interests to help ensure the short- and long-term growth of ITW.

 

 

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Compensation Objectives

We emphasize a total compensation approach in establishing individual executive compensation levels with each component of compensation serving a specific purpose. In addition to paying a competitive base salary, we use a mix of different performance-based components of compensation that reward different aspects of both Company and individual performance. Our 2019 executive compensation program consisted of both fixed (base salary) and variable (annual cash incentives and long-term incentive compensation) components, as illustrated below:

2019 Compensation Components

 

     
    

Compensation
Component

 

 

    Form    

 

 

Objective

 

FIXED   Base Salary   Cash  

 

Market competitive pay levels to attract and retain highly qualified leaders

 

Reflective of individual performance, experience and scope of responsibility

VARIABLE  

Annual Executive

Incentive Plan

(EIP)

  Cash   Motivate executives to achieve annual Company and business segment performance goals
  Stock Options   Equity   Reward executives for delivering on the long-term performance goals aligned with the Company’s strategy and creating long-term stockholder value
 

Performance

Share Units

(PSUs)

  Equity
 

Performance

Cash

  Cash

 

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Ongoing Best Practices

We regularly review and refine our executive compensation program to ensure that it continues to address practices and policies that are aligned with our pay-for-performance philosophy and the interests of our stockholders. In this regard, our 2019 compensation program reflects the following:

 

What We Do

 

 

What We Don’t Do

 

       

   

 

Pay for Performance

Our NEOs’ average total target direct compensation is 82% performance based.

 

 

û

 

Employment Agreements

We do not provide executive officers with employment agreements.

 

     

 

Robust Stock Ownership Guidelines

We have stock ownership guidelines for our executive officers of 6 x salary for CEO, 3 x salary for Vice Chairman, Executive Vice Presidents and CFO and 2 x salary for Senior Vice Presidents.

 

  û  

Tax Gross-ups

We do not provide tax gross-ups as part of our change-in-control agreements.

 

     

 

Annual “Say on Pay” Vote

We hold an annual advisory vote for our stockholders to review and approve our executive compensation programs.

 

  û  

Repricing

We do not allow share repricing within our stock option plan.

     

 

Independent Compensation Consultant The Committee: (1) engages an independent compensation consultant who advises the Committee on regulatory and other current trends and key developments in executive compensation and (2) reassesses its consultant’s independence annually.

 

  û  

Hedging/Pledging of Company Stock

We prohibit executive officers and directors from engaging in any transaction that is designed to hedge or offset a decrease in the market value of ITW stock and from pledging ITW shares.

     

 

Annual CEO and NEO Performance Review

The Committee conducts an annual review of the performance of the CEO, as well as the other executive officers.

 

  û  

Dividends on Unvested Equity Awards

We do not pay dividends on unvested equity awards, including restricted stock units and performance shares.

 

     

 

Annual Review of Compensation Programs

The Committee, with input from its independent compensation consultant, conducts an annual review of our executive compensation programs, considering business strategies, best practices and good governance.

 

  û  

Single-Trigger Change-In-Control Vesting/Benefits

We do not allow immediate vesting of equity awards that are continued or replaced upon a change-in-control; all such awards allow only double-trigger vesting (change-in-control and termination).

 

     

 

Clawback Policy

Our Compensation Recovery Policy provides for the reimbursement of incentives if a material financial restatement is required.

 

       
     

 

Annual Compensation Risk Assessment Each year we perform an assessment of risks that could result from our executive compensation plans and programs.

 

       

 

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Say on Pay Advisory Voting Results

In 2017, 2018 and 2019, 97.2 percent, 95.5 percent and 95.9 percent, respectively, of stockholder votes were cast to approve the compensation of our NEOs. The Committee believes that this favorable vote is confirmation that our stockholders believe the pay of our NEOs is appropriately aligned with the performance of the Company and the interests of our stockholders. The Committee therefore determined that it was not necessary to make any changes to our executive compensation practices as a result of the Say on Pay votes.

How We Make Compensation Decisions

 

Role of the Compensation Committee

The Committee conducts an annual review of ITW’s practices and the compensation of our executive officers to ensure:

 

   

The components of the total compensation package are aligned with the market to attract and retain the caliber of talent required to deliver on our business strategies;

 

   

Compensation decisions are meaningfully differentiated to appropriately reflect the contributions of our highest performers; and

 

   

Our incentive programs drive performance aligned with our strategy and the Company’s culture and values.

In making its executive compensation decisions and recommendations, the Committee is guided by the following factors:

 

   

Our compensation philosophy;

 

   

Compensation comparisons from a peer group of diversified multinational industrial companies with similar size, value, and complexity; and

 

   

Management’s contribution to our short- and long-term goals based on profitable growth and strong returns on capital.

See “Board of Directors and Its Committees — Compensation Committee” under “Proposal 1 — Election of Directors” for more information about the function of the Committee.

Role of the Compensation Consultant

The Committee engages an independent advisor, Frederic W. Cook & Co., Inc. (Cook), to work directly on its behalf and in cooperation with management to review ITW’s executive compensation program, confirm appropriateness of our peer companies, and assess our compensation governance process. In 2019, Cook conducted a marketplace review of the compensation we pay to our executive officers. Cook provided the Committee with relevant market data, including a review of our pay and performance and that of our peers, reviewed the peer companies we use for comparison purposes, and benchmarked our compensation against our peer companies. Cook also assisted the Committee with its assessment of compensation-related risk.

With respect to CEO compensation, on an annual basis, Cook provides an independent recommendation to the Committee for its consideration. In developing its recommendation, Cook relies on its understanding of ITW’s business, strategy and compensation programs, as well as its own independent research and analysis including ITW’s peer group. Cook does not meet with the CEO with respect to his compensation.

 

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Table of Contents

Peer Companies

 

The Committee has identified a group of comparable companies, which we refer to as the peer group, to benchmark executive compensation and provide

competitive market data to be used in establishing and recommending each component of compensation. The peer group is reviewed annually by the Committee with assistance from Cook. In addition, the Committee refers to market data based on manufacturing companies within the Aon TCM Online Executive survey using regression analysis and tabular long-term incentive data and the Mercer Executive Compensation survey with a revenue range of $5 billion to $20 billion for corporate executives and $1.2 billion to $3.75 billion for the operating executives.

 

In connection with its annual review in 2019, the Committee determined that no changes to the 2018 peer group were warranted.

 

   

 

Peer Group Selection Criteria:

 

•   U.S. publicly traded companies from ITW’s same and related industries, identified based on Standard & Poor’s Global Industry Classification Standard (GICS) codes;

 

•   Companies with one-fourth to four times our revenue and market capitalization with broadly similar businesses and pay models;

 

•   Companies that compete for the same customers with similar products and/or services; and

 

•   Companies with whom we may compete for executive talent.

 

For 2019, the Committee confirmed the following 17 companies to be used as the Company’s peer group:

 

3M Company    Emerson Electric Co.    Parker-Hannifin Corporation
Caterpillar Inc.    Fortive Corporation    PPG Industries, Inc.
Cummins Inc.    General Dynamics Corporation    Raytheon Company
Deere & Company    Honeywell International Inc.    Rockwell Automation, Inc.
Dover Corporation    Ingersoll-Rand plc    Stanley Black & Decker, Inc.
Eaton Corporation plc    Johnson Controls, Inc.   

The revenue median of the peer group was $21.7 billion based on the twelve-month average of reported financial results through April 30, 2019, and the median market capitalization was $32.0 billion, versus $14.58 billion and $46.6 billion, respectively, for ITW.

The nature of our decentralized and diverse lines of business presents challenges in identifying similar organizations for comparison purposes; however, we believe that the peer group selected provides relevant comparisons.

Compensation Decisions and Individual Compensation Levels

On an annual basis, the CEO reviews the total compensation of the NEOs and makes recommendations to the Committee based on his assessment of each executive’s individual performance and peer group compensation information. The Committee makes recommendations to the independent directors regarding the CEO’s compensation based on an assessment of the CEO’s performance and peer group compensation information. There are no material differences in the policies and decision processes used in setting compensation for the CEO and the other NEOs. However, the different levels of compensation for the NEOs, as shown in the Summary Compensation Table of this proxy statement, reflect internal factors such as each executive’s scope of responsibility, performance, impact on profitable growth and breadth of experience, as well as compensation data from the peer group.

 

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Table of Contents

Components of the 2019 Executive Compensation Program

 

Base Salary

In determining base salary, the CEO and the Committee consider the size and scope of the executive officers’ responsibilities, experience, performance, market data and the median base salary of similar positions at our peer group companies. The Committee believes that median base salary is an appropriate general reference point to use for encouraging solid performance. Base salaries are reviewed annually, and adjustments are intended to recognize performance and contributions over the prior year, as well as any significant changes in duties or scope of responsibility.

For 2019, the Committee did not recommend an adjustment to Mr. Santi’s base salary after reviewing his compensation history as CEO and his base salary relative to the competitive practices of ITW’s peers. This recommendation was approved by the Board’s independent directors. For the other NEOs, the Committee approved recommended base pay merit increases of 4.0 percent. These base salary increases were effective February  25, 2019.

Annual Executive Incentive Plan

We believe that executives generally should be rewarded for their contributions to the overall financial success measured by income and organic growth of the Company as a whole, and, if applicable, the business segment he or she leads. Achieving our annual financial objectives is important to executing our current strategic objectives and delivering long-term value to stockholders. The Committee recommends the annual incentive target award for the CEO, which is subject to approval by the independent directors of the full Board. The Committee determines and approves the performance results and annual incentive target awards for the other NEOs.

The annual Executive Incentive Plan (EIP) is composed solely of financial performance measures for our NEOs. The financial metric weighting for Mr. Santi, Mr. O’Herlihy and Mr. Larsen was based 60 percent on Company operating income and 40 percent on Company organic revenue growth. For Mr. Martindale and Mr. Hartnett, the weighting of the financial measures was based 60 percent on operating income and 40 percent on organic revenue growth, with 50 percent of each metric based on Company results and 50 percent on results of their respective business segments. The financial measures were recommended by management and approved by the Committee at the start of the performance year. While the Committee has the discretion to make adjustments in the calculation of financial performance to eliminate factors beyond the control of management and to eliminate possible disincentives to act in the long-term best interests of the Company and our stockholders, no such adjustments were made to the 2019 financial results.

2019 EIP Financial Measures

For 2019, executive officers were eligible to earn a payment according to the performance scales below.

2019 EIP Company Financial Targets

 

     

Operating 

Income Growth 

vs. Prior Year 

  

Operating
Income Growth 
Payout 

(as a % of 

Target)* 

  

Organic 

Revenue 

Growth 

  

Organic 

Revenue Payout 

(as a % of 

Target)* 

         

Maximum

 

   116%

 

   200%

 

   4.2%

 

   200%

 

         

Target

 

   106%

 

   100%

 

   2.2%

 

   100%

 

         

Threshold

 

   85%

 

   50%

 

   0.2%

 

   0%

 

*Interpolation is used for measuring achievement between threshold and target and target and maximum.

 

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Table of Contents

The following table shows the actual goal achievement for the corporate NEOs.

2019 EIP Company Performance Results

 

Operating Income Growth vs. Prior Year*

 

 

Organic Revenue Growth*

 

    
                 
2018   2019   Achievement

Percent

  Payout

Percent

  2018   2019   Achievement

Percent

  Payout

Percent

  Total Payout

Percent

                 
$3.6B   $3.5B   97.2%   79.1%   $14.8B   $14.5B   -1.9%   0.0%   47.5%

*Calculated on a constant currency basis.

2019 EIP Total Payouts

The total 2019 payouts to the NEOs ranged from 47.2 percent to 50.9 percent of target award level.

Payouts for Named Executive Officers

 

Named Executive Officer   Award
Target
  Year-End
2019
Salary
  Total Payout
Percent
  Total Payout
Amount
(1)
         

E. Scott Santi

  150%   $1,315,000   47.5%      $936,149
         

Christopher A. O’Herlihy

    90%      $790,333   47.5%      $337,583
         

Michael M. Larsen

    90%      $789,286   47.5%      $337,135
         

Steven L. Martindale

    80%      $609,184   50.9%      $248,254
         

John R. Hartnett

    80%      $539,593   47.2%      $203,837

 

(1)

These amounts are included in the Summary Compensation Table under “Non-Equity Incentive Plan Compensation.” The award payout is calculated as a percent of base salary.

Long-Term Incentives

 

The value of the overall long-term incentive award for the

 

CEO is determined by the Committee, subject to approval by the independent directors of the full Board of Directors. Awards to other NEOs are recommended by the CEO to the Committee for approval.

 

The key factors in determining the awards are the executive’s position, performance, potential to contribute to the long-term success of the Company, breadth of experience and prior awards. In addition, although we generally do not establish any specific target or prescribed value in relation to the peer group, comparisons are made to long-term incentive levels in the peer group and market

 

 

We believe that ensuring the long-term growth and profitability of the business is a primary management responsibility. Therefore, a significant portion of an executive officer’s compensation should be directly linked to key financial performance measures that consider the long-term perspective, such as operating margin, After-Tax ROIC, EPS and ITW’s share price over time.

 

compensation data.  

In 2019, the NEOs received 50 percent of their award in stock options and 50 percent in other performance-based awards (25 percent payable in PSUs and 25 percent payable in cash). The stock option awards are combined with the other performance-based awards to closely align long-term incentives with the financial performance objectives of the Company’s strategy. The weightings of the total target values of the 2019 long-term incentive equity and cash awards are as follows:

2019 Long-Term Incentive Award Weightings

 

Position  

Stock     

Options     

  PSUs       

Performance     

Cash     

All Executive Officers

  50%   25%   25%

 

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Performance based awards are split between performance share units and cash to provide a balanced opportunity based on both financial results and stock price performance. We believe that stock options are an effective incentive because they directly align the interests of the executives with those of our stockholders, as an unexercised stock option has no realizable value if our stock price falls below the exercise price, while the value increases along with increases in our stock price above the exercise price.

The Committee has established specific vesting and expiration provisions associated with termination of employment due to death, disability and retirement, as defined in the applicable awards, and forfeiture provisions upon other termination of employment. The Committee, in its sole discretion, may deem a long-term incentive award, whether vested or unvested, to be immediately forfeited if the recipient competes with the Company, engages in gross misconduct or conduct that is against the business interests of the Company, or divulges confidential information about the Company to others.

2019 Stock Option Awards

The 2019 stock options vest in equal installments over a four-year period ending in 2023. Stock options are awarded with an exercise price equal to the fair market value of the common stock on the date of grant and normally expire ten years after the award date. In recent years, including 2019, we awarded only non-qualified stock options because we believed that the tax benefits to the Company of non-qualified stock options outweighed the potential tax benefits to the NEOs of incentive stock options.

2019-2021 Performance Share Units and Performance Cash Awards

The PSUs and Performance Cash awards vest three years from the date of award, subject to the achievement of the performance goals set at the beginning of the performance period. PSUs are awarded based on the fair market value of one share of ITW common stock on the date of award. Dividend equivalents are accrued and added to the original grants as reinvested dividends for all PSU grants since 2017. These reinvested dividends are paid only on PSUs earned at the end of the performance period.

The goals for the 2019 PSUs and Performance Cash awards are equally weighted and based on operating margin, After-Tax ROIC and EPS growth. The payout range is 50 percent to 200 percent of the target award for threshold to maximum performance. Performance below threshold results in no payout for the weighted portion for that metric. The payout at the end of the performance period will be based on the following payout scale:

2019-2021 PSU and Performance Cash Payout Scale

 

     

Operating

Margin

 

  

After-Tax  

ROIC  

 

  

EPS   

Growth   

 

  

Payout  

(as a Percent of  

Target)  

 

Maximum

 

  

27%

 

  

27%

 

  

12%

 

  

200%

 

Target

 

  

25%

 

  

25%

 

  

8%

 

  

100%

 

Threshold

 

  

23%

 

  

20%

 

  

5%

 

  

50%

 

Note: Interpolation is used for measuring achievement between threshold and target and maximum and target.

 

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Table of Contents

2017-2019 Performance Share Units and Performance Cash Awards Payout

In 2017, executives were awarded PSUs and Performance Cash awards with a three-year performance period from January 1, 2017 to December 31, 2019. The awards had the same financial metrics and weightings as the 2019-2021 performance awards noted above. Payouts ranged from a threshold of 50 percent of target to a maximum of 200 percent of target. The table below details the performance and associated payouts of the 2017-2019 PSU and Performance Cash awards:

 

Long-Term Performance Results

 

   

Performance Scale and Payout

 

 
       

Metrics
(Weighting)

 

 

FY

2017

 

   

FY

2018

 

   

FY

2019

 

   

3 Year

Average

 

   

Threshold
50% of Target

 

   

Target
100% of Target

 

   

Maximum
200% of Target

 

   

Payout
% of Target

 

 

Operating Margin (1/3rd)

    24.4%       24.3%       24.1%       24.3     20.0     23.0     26.0     142.2

After-Tax ROIC (1/3rd)

    24.0%       26.5%       26.6%       25.7     16.0     20.0     24.0     200.0

EPS Growth (1/3rd)

    15.9%       6.8%       0.3%       7.7     5.0     8.0     12.0     94.4

Total Payout: 145.5% 

Note: After-Tax ROIC and EPS Growth were calculated assuming an effective tax rate of 29.5% for each of the years in the performance period.

Timing of Long-Term Incentive Awards

The Committee meets in February of each year following the Company’s public release of its earnings results for the recently completed fiscal year to consider and act with respect to long-term incentive awards for the executive officers. Long-term awards are made in compliance with the Long-Term Incentive Plan, including the requirement that stock options may not be awarded at less than 100 percent of the fair market value of ITW’s common stock on the date of award. The exercise price of the awards is based on the closing price of ITW’s stock on the date of award. We do not time awards for the purpose of enhancing the value of executive compensation.

 

Compensation Governance Practices and Policies

 

Stock Ownership Guidelines

We believe that stock ownership is important because it aligns the interests of our management and directors with those of our stockholders and mitigates compensation-related risk. Because of the importance of stock ownership, the Board of Directors and the Committee have adopted stock ownership guidelines for executive officers and directors. The guidelines for stock ownership as a multiple of executive officers’ base salaries and of directors’ annual retainers are as follows:

 

Title

 

  

Guideline

 

Chief Executive Officer

 

  

6 times salary

 

Vice Chairman, Executive Vice Presidents, and Chief Financial Officer

 

  

3 times salary

 

Senior Vice Presidents

 

  

2 times salary

 

Non-employee Directors

 

  

5 times annual retainer

 

The Committee expects that an executive officer or non-employee director will achieve the applicable ownership level within five years. The achievement of these guidelines is reviewed annually. The Board of Directors believes that its stock ownership guidelines are appropriate, reasonable and attainable given the responsibilities and compensation levels of our executive officers and directors and has not deemed it necessary to impose a holding period requirement for shares owned by our executive officers and directors.

 

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All executive officers and directors who have been in their positions for five or more years have met or exceeded the applicable stock ownership guidelines.

Anti-Hedging and Pledging Policy

Pursuant to the Company’s Hedging/Anti-Pledging Policy, all employees (including executive officers) and directors that receive equity-based awards from the Company are prohibited from trading ITW options or engaging in short sales of ITW stock. In addition, all executive officers and directors and their designees are prohibited from purchasing or selling any financial instrument or otherwise engaging in any transaction that hedges or offsets, or is designed to hedge or offset, any decrease in the market value of ITW equity securities. In addition, since April 2013, our executive officers and directors have been prohibited from pledging ITW stock, and all pledged shares are excluded from ownership for purposes of our stock ownership guidelines.

Compensation Recovery Policy

We maintain a Compensation Recovery Policy (a “clawback policy”) applicable to all executive officers of the Company subject to Section 16 of the Securities Exchange Act of 1934. Under the policy, the Committee will seek reimbursement of incentives paid to executive officers in the prior three years where the payment was predicated upon the achievement of certain financial results with respect to the applicable performance period that was subsequently the subject of a material restatement due to material non-compliance of the Company with any financial reporting requirement under the U.S. securities laws. The reimbursement amount is equal to the excess of the gross incentive payment made over the gross payment that would have been made if the original payment had been determined based on the restated financial results. Further, following a material restatement of our financial statements, we will seek reimbursement of compensation and profits from trading in Company stock received by our CEO and CFO to the extent required under Section 304 of the Sarbanes-Oxley Act of 2002.

2019 Risk Assessment

The Committee, together with management and Cook, annually considers potential risks when reviewing our compensation programs for all employees, including our executive officers. Based on this assessment, the Committee concluded that our 2019 compensation programs do not create risks that are reasonably likely to have a material adverse effect on ITW. In making this determination, the Committee reviewed the key design elements of our compensation programs, as well as the means by which any potential risks may be mitigated, including:

 

   

A Balanced Mix of Compensation Components — The target compensation mix for our executive officers is composed of salary, annual cash incentives and long-term cash and equity incentives, representing a mix that is not overly weighted toward short-term cash incentives.

 

   

Multiple Performance Factors — Our incentive compensation plans use Company-wide measures, which encourage focus on the achievement of objectives for the overall benefit of the Company. Multiple financial goals also prevent an overemphasis on any one metric.

 

   

Long-Term Incentives — Our long-term incentives are primarily equity-based, and our PSUs and Performance Cash awards are subject to performance goals. These long-term incentives have three-year vesting schedules (PSUs and performance cash) or four-year vesting schedules (stock options), in each case to complement our annual cash-based incentives.

 

   

Capped Incentive Awards — Annual and long-term incentive awards, PSUs and Performance Cash are all capped at 200 percent of target.

 

   

Stock Ownership Guidelines — Our guidelines call for significant share ownership, which further aligns the interests of our executive officers with the long-term interests of our stockholders.

 

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Clawback Policy — Our Compensation Recovery Policy authorizes the Committee to recoup past incentive compensation in the event of a material restatement of the Company’s financial results.

 

   

Prohibition on Hedging and Pledging — Executive officers and directors are subject to Company policy that prohibits pledging and hedging activities with respect to ITW stock.

 

   

Committee Oversight — The Committee has ultimate authority to determine, and reduce if appropriate, compensation provided to our executive officers.

 

   

Independent Compensation Consultant — The Committee retains an outside independent compensation consultant.

Section 162(m) and Regulatory Considerations

Internal Revenue Code Section 162(m) limits the deductibility of compensation in excess of $1,000,000 paid to any one NEO in any calendar year. Under the tax rules in effect prior to 2018, compensation that qualified as “performance-based” under Section 162(m) was exempt from this $1 million limit. However, the Tax Cuts and Jobs Act, which was signed into law December 22, 2017, eliminated this performance-based compensation exception effective January 1, 2018, subject to a special rule for certain awards and arrangements that were in effect on or before November 2, 2017. The Company has determined that only the stock option awards that were in effect as of November 2, 2017, are intended to qualify as performance-based under the special grandfather rules.

Effective January 1, 2018, compensation awarded in excess of $1,000,000 to our NEOs generally will not be deductible. The Committee will, consistent with its past practice, continue to retain flexibility to design compensation programs that are in the best long-term interests of the Company and our stockholders, with deductibility of compensation being one of a variety of considerations taken into account.

Committee’s Independent Consultant

Cook, the independent compensation consultant, has been retained by and reports directly to the Committee. It also provides peer group directors’ compensation data to the Corporate Governance and Nominating Committee; it does not have any other consulting engagements with management or ITW. Based on its consideration of factors under NYSE listing standards, the Committee concluded that the work performed by Cook and its senior advisor involved in the engagement did not raise any conflict of interest or independence concerns.

 

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Table of Contents

NEO Compensation

The following tables provide information regarding the compensation of our NEOs.

Summary Compensation Table

 

 

Name and

Principal Position

  Year   Salary(1)     Bonus   Stock
Awards(2)
    Option
Awards(2)
    Non-Equity
Incentive Plan
Compensation
(1)(3)
    Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings(4)
    All Other
Compensation
(5)
    Total  

E. Scott Santi

 

2019

 

 

$1,315,000

 

 

  -  

 

 

$2,874,971

 

 

 

$5,749,974

 

 

 

$4,755,524  

 

 

 

$   666,086  

 

 

 

$  78,790  

 

 

 

$15,440,345

 

Chairman & CEO

 

2018

 

 

$1,306,747

 

 

  -  

 

 

$2,749,839

 

 

 

$5,499,988

 

 

 

$5,910,732  

 

 

 

$2,146,099  

 

 

 

$  95,111  

 

 

 

$17,708,516

 

   

2017

 

 

$1,253,684

 

 

  -  

 

 

$2,624,896

 

 

 

$5,249,987

 

 

 

$6,112,840  

 

 

 

$1,727,424  

 

 

 

$141,039  

 

 

 

$17,109,870

 

Michael M. Larsen

 

2019

 

 

$   784,750

 

 

  -  

 

 

$   712,397

 

 

 

$1,424,978

 

 

 

$1,337,448  

 

 

 

-   

 

 

 

$135,810  

 

 

 

$  4,395,383

 

Senior Vice President & CFO

 

2018

 

 

$   754,671

 

 

  -  

 

 

$   712,413

 

 

 

$1,424,983

 

 

 

$1,838,508  

 

 

 

-   

 

 

 

$150,208  

 

 

 

$  4,880,783

 

   

2017

 

 

$   727,341

 

 

  -  

 

 

$   687,488

 

 

 

$1,374,984

 

 

 

$2,017,978  

 

 

 

-   

 

 

 

$204,718  

 

 

 

$  5,012,509

 

Christopher A. O’Herlihy

 

2019

 

 

$   785,791

 

 

  -  

 

 

$   749,892

 

 

 

$1,499,986

 

 

 

$1,283,333  

 

 

 

$   378,838  

 

 

 

$175,220  

 

 

 

$  4,873,060

 

Vice Chairman

 

2018

 

 

$   746,537

 

 

  -  

 

 

$   749,986

 

 

 

$1,499,976

 

 

 

$1,614,156  

 

 

 

-   

 

 

 

$193,174  

 

 

 

$  4,803,829

 

   

2017

 

 

$   667,116

 

 

  -  

 

 

$   649,984

 

 

 

$1,299,994

 

 

 

$1,427,813  

 

 

 

$   330,941  

 

 

 

$242,629  

 

 

 

$  4,618,477

 

Steven L. Martindale

 

2019

 

 

$   605,683

 

 

  -  

 

 

$   362,400

 

 

 

$   724,996

 

 

 

$   684,754  

 

 

 

$       5,185  

 

 

 

$118,389  

 

 

 

$  2,501,407

 

Executive Vice President

 

2018

 

 

$   583,139

 

 

  -  

 

 

$   337,338

 

 

 

$   674,976

 

 

 

$   992,924  

 

 

 

$       4,961  

 

 

 

$158,758  

 

 

 

$  2,752,096

 

John R. Hartnett

 

2019

 

 

$   536,492

 

 

  -  

 

 

$   337,451

 

 

 

$   674,968

 

 

 

$   658,525  

 

 

 

$   357,837  

 

 

 

$  25,908  

 

 

 

$  2,591,181

 

Executive Vice President

                                                               

Note: Years prior to becoming an NEO are not presented in this table.

 

(1)

The Salary and Non-Equity Incentive Plan Compensation columns for 2019 include amounts deferred by the executive under the Executive Contributory Retirement Income Plan (ECRIP) and the Savings and Investment Plan. The deferral amounts for each year shown for each NEO can be found in the Footnote 1 Table to the table under the “ITW Retirement Plans — Nonqualified Deferred Compensation” section.

 

(2)

The Stock Awards column represents PSUs awarded in 2019, 2018, and 2017. The amounts shown represent the target amount that may be earned. The Option Awards column represents stock options awarded in the relevant year, and the assumptions applicable to these valuations can be found in Note 14 of the Notes to Financial Statements — Stock-Based Compensation contained in the Illinois Tool Works Inc. Annual Report on Form 10-K for the year ended December 31, 2019.

 

(3)

These amounts include awards made under ITW’s 2019 Executive Incentive Plan and 2017-2019 Long-term Performance Cash award payouts made under our Long-Term Incentive Plan. The following table shows the award payouts under each plan.

Footnote 3 Table

 

Name   EIP Award     Performance Cash     Non-Equity Incentive
Plan Compensation
 

E. Scott Santi

  $ 936,149       $3,819,375       $4,755,524  

Michael M. Larsen

  $ 337,135       $1,000,313       $1,337,448  

Christopher A. O’Herlihy

  $ 337,583       $945,750       $1,283,333  

Steven L. Martindale

  $ 248,254       $436,500       $684,754  

John R. Hartnett

  $ 203,837       $454,688       $658,525  

 

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Table of Contents
(4)

These amounts include an amount of interest in the applicable calendar year considered to be in excess of market rates credited to the deferred compensation accounts of the NEOs under the ECRIP, discussed in more detail under “Nonqualified Deferred Compensation” below. When a participant attains retirement eligibility at age 55 with 10 years of service, any amounts in his or her ECRIP account deferred prior to January 1, 2010 are entitled to a return of 130 percent of the monthly Moody’s Corporate Bond Yield Average rate, and the excess interest portion is deemed to be amounts exceeding 100 percent of such rate. This additional interest credit applies to all eligible plan participants, including the eligible NEOs. All amounts deferred after December 31, 2009 accrue interest at 100 percent of the Moody’s Rate. The individual amounts of pension benefits and excess interest credits earned in each year are shown in the table below.

Footnote 4 Table

 

Name   Year   Accrual in ITW
Retirement
Accumulation Plan
    Accrual in ITW
Nonqualified
Pension Plan
    Excess Interest on
Deferred
Compensation
    Change in Pension
Value and NQDC
Earnings
 

E. Scott Santi

  2019     $58,461       $591,815       $15,810       $666,086  
    2018     $57,798       $2,072,676       $15,625       $2,146,099  
    2017     $54,458       $1,657,294       $15,672       $1,727,424  

Michael M. Larsen*

  2019                        
    2018                        
    2017                        

Christopher A. O’Herlihy**

  2019     $378,838                   $378,838  
    2018     $(213,241)                   $(213,241)  
    2017     $330,941                   $330,941  

Steven L. Martindale***

  2019                 $5,185       $5,185  
    2018                 $4,961       $4,961  
                                     

John R. Hartnett

  2019     $64,278       $285,832       $7,727       $357,837  

* Mr. Larsen joined the Company in September 2013. Consequently, his ECRIP deferrals are not eligible for the 130 percent rate. He is not eligible to participate in the Company’s pension plans, which were closed to new entrants effective January 1, 2007.

**Mr. O’Herlihy participated in the ITW Retirement Accumulation Plan from 1989 through 1999. From 1999 through August 2011, he was employed in Ireland, participated in the ITW Irish Pension Plan and ceased active participation in the U.S. plan. Upon his return to the U.S. in 2011, he was ineligible to actively participate in the U.S. plan due to the plan participation closure effective January 1, 2007. The ITW Irish Pension Plan accrual is included in the “Accrual in ITW Retirement Accumulation Plan” column above, because this amount also represents a qualified pension plan present value.

***Mr. Martindale is not eligible for the Company’s pension plans. Mr. Martindale was hired by Instron in 2002, which was acquired by the Company in 2005. In connection with the acquisition, Instron employees were not made eligible for the ITW Retirement Accumulation Plan.

 

(5)

These amounts include the Company contributions to the ECRIP and the Savings and Investment Plan, based on plan rules for all eligible participants.

 

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Table of Contents

Grants of Plan-Based Awards

 

The table below provides information regarding plan-based awards granted to our NEOs during fiscal year 2019 under the ITW Executive Incentive Plan (EIP) and the Long-Term Incentive Plan.

 

              

 

Estimated Future Payouts

Under Non-Equity

Incentive Plan Awards(1)(2)

   

 

Estimated Future Payouts

Under Equity

Incentive Plan Awards (3)

   

All Other

Stock
Awards:

Number of

Shares of

Stock or

Units

(#)

   

All Other
Option

Awards:

Number of

Securities

Underlying

Options
(#)

   

Exercise or

Base Price

of Option

Awards

($) (4)

   

Grant Date

Fair Value

of Stock

And

Option

Awards
($)(5)

 
          
          
          
          
Name  

Grant

Date

 

Plan

Type

  Threshold
($)
   

Target

($)

    Maximum
($)
    Threshold
(#)
    Target
(#)
    Maximum
(#)
 

E. Scott Santi

   

EIP

 

 

 

 

 

1,972,500

 

 

 

3,945,000

 

               
   

2/15/2019

 

Perf. Cash

 

 

1,437,500

 

 

 

2,875,000

 

 

 

5,750,000

 

               
   

2/15/2019

 

PSUs

       

 

9,968

 

 

 

19,936

 

 

 

39,872

 

       

 

2,874,971

 

   

2/15/2019

 

Stock Options

               

 

167,345

 

 

 

144.21  

 

 

 

5,749,974

 

Michael M. Larsen

   

EIP

 

 

 

 

 

710,357

 

 

 

1,420,715

 

               
   

2/15/2019

 

Perf. Cash

 

 

356,250

 

 

 

712,500

 

 

 

1,425,000

 

               
   

2/15/2019

 

PSUs

       

 

2,470

 

 

 

4,940

 

 

 

9,880

 

       

 

712,397

 

   

2/15/2019

 

Stock Options

               

 

41,472

 

 

 

144.21  

 

 

 

1,424,978

 

Christopher A. O’Herlihy

   

EIP

 

 

 

 

 

711,300

 

 

 

1,422,599

 

               
   

2/15/2019

 

Perf. Cash

 

 

375,000

 

 

 

750,000

 

 

 

1,500,000

 

               
   

2/15/2019

 

PSUs

       

 

2,600

 

 

 

5,200

 

 

 

10,400

 

       

 

749,892

 

   

2/15/2019

 

Stock Options

               

 

43,655

 

 

 

144.21  

 

 

 

1,499,986

 

Steven L. Martindale

   

EIP

 

 

 

 

 

487,347

 

 

 

974,694

 

               
   

2/15/2019

 

Perf. Cash

 

 

181,250

 

 

 

362,500

 

 

 

725,000

 

               
   

2/15/2019

 

PSUs

       

 

1,257

 

 

 

2,513

 

 

 

5,026

 

       

 

362,400

 

   

2/15/2019

 

Stock Options

               

 

21,100

 

 

 

144.21  

 

 

 

724,996

 

John R. Hartnett

   

EIP

 

 

 

 

 

431,674

 

 

 

863,349

 

               
   

2/15/2019

 

Perf. Cash

 

 

168,750

 

 

 

337,500

 

 

 

675,000

 

               
   

2/15/2019

 

PSUs

       

 

1,170

 

 

 

2,340

 

 

 

4,680

 

       

 

337,451

 

   

2/15/2019

 

Stock Options

                                                         

 

19,644

 

 

 

144.21  

 

 

 

674,968

 

 

(1)

The range of potential payouts under the EIP awards for the NEOs as determined by the Committee in February 2019 for 2019 performance is set forth in these columns. The financial performance components and corresponding payouts as a percent of target are shown under “Components of the 2019 Executive Compensation Program — Annual Executive Incentive Plan.”

 

(2)

The range of potential payouts under the Performance Cash awards for the three-year period 2019 through 2021 is set forth in these columns.

 

(3)

The range of potential share distributions under the 2019 PSU award for the NEOs as set by the Committee in February 2019 for performance for the three-year period 2019 through 2021 is set forth in these columns.

 

(4)

Exercise price is equal to the closing price on the grant date.

 

(5)

Grant date fair values of options awarded to the NEOs on February 15, 2019 were based on an implied value of $34.36 per share as determined using a binomial valuation technique under Accounting Standards Codification Topic 718. Grant date fair value of PSUs was based on the assumption that the performance conditions will be met.

 

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Outstanding Equity Awards at Fiscal Year-End 2019

 

The following table sets forth details, on an award-by-award basis, of the outstanding equity awards held by each NEO as of December 31, 2019.

 

     Option Awards         

Stock Awards

 

 

Name

 

 

Grant Date

(1)

 

   

Number of
Securities
Underlying
Unexercised
Options
Exercisable (#)

 

   

Number of
Securities
Underlying
Unexercised
Options
Unexercisable (#)

 

   

Option
Exercise
Price ($)

 

   

Option
Expiration
Date

 

       

Number of
Shares or
Units of
Stock that
Have Not
Vested (#)

 

   

Market
Value of
Shares or
Units that
Have Not
Vested ($)

 

   

Equity Incentive
Plan Awards:
Number of
Unearned Units
that Have Not
Vested (#)(2)

 

   

 

Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Units That
Have Not
Vested ($)

 

 

E. Scott Santi

 

 

2/15/2019

 

 

 

 

 

 

167,345

 

 

 

144.21

 

 

 

2/15/2029

 

     

 

 

 

 

 

 

 

20,350.620

 

 

 

3,655,582

 

                     
   

 

2/15/2018

 

 

 

35,863

 

 

 

107,590

 

 

 

163.36

 

 

 

2/15/2028

 

     

 

 

 

 

 

 

 

17,623.913

 

 

 

3,165,783

 

                     
   

 

2/10/2017

 

 

 

97,838

 

 

 

97,838

 

 

 

128.00

 

 

 

2/10/2027

 

     

 

 

 

 

 

 

 

21,884.559

 

 

 

3,931,123

 

                     
   

 

2/12/2016

 

 

 

149,850

 

 

 

49,950

 

 

 

91.88

 

 

 

2/12/2026

 

     

 

 

 

 

 

 

 

 

 

 

 

                     
   

 

2/13/2015

 

 

 

184,645

 

 

 

 

 

 

98.26

 

 

 

2/13/2025

 

     

 

 

 

 

 

 

 

 

 

 

 

                     
   

 

2/14/2014

 

 

 

224,422

 

 

 

 

 

 

78.59

 

 

 

2/14/2024

 

     

 

 

 

 

 

 

 

 

 

 

 

                     
   

 

2/15/2013

 

 

 

152,594

 

 

 

 

 

 

63.25

 

 

 

2/14/2023

 

     

 

 

 

 

 

 

 

 

 

 

 

   

Michael M. Larsen

 

 

2/15/2019

 

 

 

 

 

 

41,472

 

 

 

144.21

 

 

 

2/15/2029

 

   

 

 

 

 

 

 

 

5,042.740

 

 

 

905,827

 

   
   

 

2/15/2018

 

 

 

9,291

 

 

 

27,876

 

 

 

163.36

 

 

 

2/15/2028

 

   

 

 

 

 

 

 

 

4,565.907

 

 

 

820,174

 

   
   

 

2/10/2017

 

 

 

25,624

 

 

 

25,624

 

 

 

128.00

 

 

 

2/10/2027

 

   

 

 

 

 

 

 

 

5,731.797

 

 

 

1,029,603

 

   
   

 

2/12/2016

 

 

 

33,716

 

 

 

11,239

 

 

 

91.88

 

 

 

2/12/2026

 

   

 

 

 

 

 

 

 

 

 

 

 

   
   

 

2/13/2015

 

 

 

21,866

 

 

 

 

 

 

98.26

 

 

 

2/13/2025

 

   

 

 

 

 

 

 

 

 

 

 

 

                     

Christopher A.

 

 

2/15/2019

 

 

 

 

 

 

43,655

 

 

 

144.21

 

 

 

2/15/2029

 

     

 

 

 

 

 

 

 

5,308.147

 

 

 

953,502

 

                     

    O’Herlihy

 

 

2/15/2018

 

 

 

9,780

 

 

 

29,343

 

 

 

163.36

 

 

 

2/15/2028

 

     

 

 

 

 

 

 

 

4,806.712

 

 

 

863,430

 

                     
   

 

2/10/2017

 

 

 

24,226

 

 

 

24,227

 

 

 

128.00

 

 

 

2/10/2027

 

     

 

 

 

 

 

 

 

5,419.115

 

 

 

973,436

 

                     
   

 

2/12/2016

 

 

 

28,096

 

 

 

9,366

 

 

 

91.88

 

 

 

2/12/2026

 

     

 

 

 

 

 

 

 

 

 

 

 

                     
   

 

2/13/2015

 

 

 

22,675

 

 

 

 

 

 

98.26

 

 

 

2/13/2025

 

     

 

 

 

 

 

 

 

 

 

 

 

                     
   

 

2/14/2014

 

 

 

29,702

 

 

 

 

 

 

78.59

 

 

 

2/14/2024

 

     

 

 

 

 

 

 

 

 

 

 

 

   

Steven L.

 

 

2/15/2019

 

 

 

 

 

 

21,100

 

 

 

144.21

 

 

 

2/15/2029

 

   

 

 

 

 

 

 

 

2,565.265

 

 

 

$460,799

 

   

    Martindale

 

 

2/15/2018

 

 

 

4,401

 

 

 

13,204

 

 

 

163.36

 

 

 

2/15/2028

 

   

 

 

 

 

 

 

 

2,162.026

 

 

 

$388,365

 

   
   

 

2/10/2017

 

 

 

11,181

 

 

 

11,182

 

 

 

128.00

 

 

 

2/10/2027

 

   

 

 

 

 

 

 

 

2,500.391

 

 

 

$449,145

 

   
   

 

2/12/2016

 

 

 

13,736

 

 

 

4,579

 

 

 

91.88

 

 

 

2/12/2026

 

   

 

 

 

 

 

 

 

 

 

 

 

   
   

 

2/13/2015

 

 

 

17,816

 

 

 

 

 

 

98.26

 

 

 

2/13/2025

 

   

 

 

 

 

 

 

 

 

 

 

 

   
   

 

2/14/2014

 

 

 

24,202

 

 

 

 

 

 

78.59

 

 

 

2/14/2024

 

   

 

 

 

 

 

 

 

 

 

 

 

   
   

 

2/15/2013

 

 

 

42,387

 

 

 

 

 

 

63.25

 

 

 

2/14/2023

 

   

 

 

 

 

 

 

 

 

 

 

 

   
   

 

2/10/2012

 

 

 

52,265

 

 

 

 

 

 

55.71

 

 

 

2/9/2022

 

   

 

 

 

 

 

 

 

 

 

 

 

                     

John R. Hartnett

 

 

2/15/2019

 

 

 

 

 

 

19,644

 

 

 

144.21

 

 

 

2/15/2029

 

     

 

 

 

 

 

 

 

2,388.667

 

 

 

429,076

 

                     
   

 

2/15/2018

 

 

 

4,238

 

 

 

12,715

 

 

 

163.36

 

 

 

2/15/2028

 

     

 

 

 

 

 

 

 

2,082.453

 

 

 

374,071

 

                     
   

 

2/10/2017

 

 

 

11,647

 

 

 

11,647

 

 

 

128.00

 

 

 

2/10/2027

 

     

 

 

 

 

 

 

 

2,604.975

 

 

 

467,932

 

                     
   

 

2/12/2016

 

 

 

14,985

 

 

 

4,995

 

 

 

91.88

 

 

 

2/12/2026

 

     

 

 

 

 

 

 

 

 

 

 

 

                     
   

 

2/13/2015

 

 

 

19,436

 

 

 

 

 

 

98.26

 

 

 

2/13/2025

 

     

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Stock options vest at the rate of 25 percent per year from the award date with exceptions for termination upon death, disability, retirement and change-in-control.

 

(2)

PSUs were granted in 2017, 2018, and 2019 and are subject to three-year vesting, as well as operating margin, After-Tax ROIC and EPS performance goals.

 

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Table of Contents

Option Exercises and Stock Vested

 

The following table provides information regarding option exercises and stock vesting for each NEO during 2019. The value realized upon the exercise of options is calculated using the difference between the option exercise price and the market price at the time of exercise multiplied by the number of shares underlying the option. The value realized upon the vesting of stock awards is based on the market price on the vesting date.

 

      Option Awards             Stock Awards  
Name    Number of
Shares
Acquired
on Exercise
(#)
     Value Realized
on Exercise
($)
           Number of
Shares
Acquired
on Vesting
(#)
     Value
Realized
on Vesting
($)
 
   

E. Scott Santi

     152,594        16,163,214                32,651        4,526,735  
   

Michael M. Larsen

     35,617        2,455,515                9,795        1,357,979  
   

Christopher A. O’Herlihy

     80,855        7,968,362                8,162        1,131,580  
   

Steven L. Martindale

     48,622        4,865,803                3,990        553,174  
   

John R. Hartnett

     53,025        4,512,097                4,353        603,500  

Pension Benefits

 

The following table provides pension benefit information through our financial statement measurement date of December 31, 2019 for each NEO serving as of that date.

 

Name   Plan Name  

 

Number of Years
of Credited
Service

 

 

Present Value of
Accumulated
Benefit

(1)(2)

 

E. Scott Santi

 

ITW Retirement Accumulation Plan

 

37.621

 

 

$929,099

 

   

ITW Nonqualified Pension Plan

 

37.621

 

 

$12,101,785

 

Michael M. Larsen

 

ITW Retirement Accumulation Plan (3)

 

-

 

 

 

   

ITW Nonqualified Pension Plan (3)

 

-

 

 

 

Christopher A. O’Herlihy

 

ITW Retirement Accumulation Plan (4)

 

10.455

 

 

$107,064

 

   

ITW Nonqualified Pension Plan (4)

 

-

 

 

 

   

ITW Irish Pension Plan (4)

 

11.167

 

 

$1,775,774

 

Steven L. Martindale

 

ITW Retirement Accumulation Plan (5)

 

-

 

 

 

   

ITW Nonqualified Pension Plan (5)

 

-

 

 

 

John R. Hartnett

 

ITW Retirement Accumulation Plan

 

33.000

 

 

$962,154

 

   

ITW Nonqualified Pension Plan

 

33.000

 

 

$2,901,800

 

 

  (1)

Assuming the individual receives a lump-sum distribution at normal retirement, present values are based on the 3.11 percent discount rate used for financial reporting purposes.

  (2)

In the event of a change-in-control or departure due to death, disability or retirement, the total pension payable is reflected in the total of the above amounts. The allocation between the ITW Retirement Accumulation Plan and the ITW Nonqualified Pension Plan depends on the actual lump sum and annuity values calculated using the actual applicable interest rates and Internal Revenue Service (IRS) limits.

  (3)

Mr. Larsen is not eligible for the Company’s pension plans, as the plans were closed to employees hired after January 1, 2007.

 

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Table of Contents
  (4)

Mr. O’Herlihy participated in the ITW Retirement Accumulation Plan from 1989 through 1999. From 1999 through August 2011, he was employed in Ireland, participated in the ITW Irish Pension Plan and ceased active participation in the U.S. plan. Upon his return to the U.S. in 2011, he ceased active participation in the Irish plan and was ineligible to actively participate in the U.S. plan due to the plan participation closure effective January 1, 2007.

  (5)

Mr. Martindale is not eligible for the Company’s pension plans. Mr. Martindale was hired by Instron in 2002, which was acquired by the Company in 2005. In connection with the acquisition, Instron employees were not made eligible for the pension plans.

ITW Retirement Plans

 

ITW Retirement Accumulation Plan

We maintain the ITW Retirement Accumulation Plan (the “Pension Plan”) for the benefit of eligible employees to provide a portion of the income necessary for retirement. The Pension Plan was closed to new entrants effective January 1, 2007. The Pension Plan is structured as a “pension equity plan” under which a participant accumulates an age-based percentage for each year of plan participation. The sum of the Accumulation Percentages multiplied by final average annual pay (salary and annual incentive EIP paid in the highest five years out of the last ten complete calendar years of service), plus the sum of the Excess Percentages multiplied by the final average annual pay above the Covered Compensation, produce an amount that can be received as a lump-sum payment or an actuarially equivalent lifetime annuity. For each year of credited service after December 31, 2000, the age-based percentages are as follows:

 

Age During the Year    Pay Accumulation Percentage   Excess Percentage (1)

Less than 30

   2%   2%

30-34

   3%   2%

35-39

   4%   2%

40-44

   5%   2%

45

   7%   2%

46-49

   7%   6%

50-54

   10%   6%

55-59

   13%   6%

60 or older

   16%   6%

 

(1)

Covered Compensation is a 35-year average of the maximum earnings recognized in calculating Social Security benefits. For 2019, the Covered Compensation amount for an individual attaining age 65 was $83,244, while for an employee age 35 or younger it was $132,900.

Prior to 2001, the Pension Plan operated under a traditional annuity formula (a normal retirement benefit equal to 1 percent of final average annual pay and 0.65 percent of such pay in excess of covered compensation for each of the first 30 years of credited service plus 0.75 percent of final average annual pay for any additional years). As part of the transition to the pension equity formula, as of December 31, 2000:

 

   

Accrued benefits under the traditional annuity formula were converted to an initial pension equity percentage by calculating the lump-sum value of the normal retirement annuity and dividing by the average annual pay at that time.

 

   

Participants who had 5 years of participation and whose age plus vesting service equaled at least 50 years were entitled to additional pension equity credits of 4 percent of final average annual pay per year for each year of employment from 2001 through 2015.

 

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Table of Contents

ITW Irish Pension Plan

The Irish Pension Plan operates under a traditional annuity formula (a normal retirement benefit equal to 1.5 percent of final average annual pay for each year of credited service). The final average annual pay is the highest consecutive pensionable base salary over any three-year period over the last ten complete years of service.

Nonqualified Pension Plan

The Nonqualified Pension Plan is maintained to make up for benefits that cannot be paid under the tax-qualified Pension Plan due to Internal Revenue Code limitations on the amount of compensation that may be considered and the amount of benefit that may be paid. The Company has not considered awarding additional years of service to executive officers under the plan and, therefore, does not currently have a policy on such awards. For the most part, the Nonqualified Pension Plan uses the same formulas and other computation elements as the Pension Plan with certain exceptions, including the following:

 

   

The Pension Plan uses net compensation after deferrals under the Executive Contributory Retirement Income Plan (ECRIP), and the Nonqualified Pension Plan uses total eligible compensation (generally, salary and EIP award).

 

   

The Nonqualified Pension Plan provides that a participant who leaves the Company, other than upon retirement, may forfeit any plan benefits based on eligible compensation above the IRS maximum amount ($280,000 in 2019) that may be recognized under a tax-qualified plan.

 

   

In addition to the annuity and lump-sum options available under the Pension Plan, a participant in the Nonqualified Pension Plan may elect to receive fixed monthly installments over 2 to 20 years. If the executive left employment prior to death, disability or retirement, or if the plan is terminated in conjunction with a change-in-control, the benefit from the Nonqualified Pension Plan would be paid as a lump sum.

Nonqualified Deferred Compensation

The Company’s ECRIP offers designated executives an opportunity to defer a portion of their salary and earned non-equity incentive to a deferred compensation account to receive the Company contributions they would otherwise receive if such deferrals had been made under our tax-qualified Savings and Investment Plan and IRS limits did not apply. Deferred amounts receive a rate of interest based on the monthly Moody’s Long-Term Corporate Bond Yield Average (the “Moody’s Rate”). All of the NEOs are eligible for the ECRIP. An ECRIP participant may defer from 6 percent to 50 percent of his or her salary and from 6 percent to 85 percent of his or her variable cash components (EIP and Performance Cash), with the applicable Company matching contribution on the salary and EIP amounts under the Savings and Investment Plan formula (in lieu of any matching contributions under that plan). Salary and EIP deferrals under the ECRIP reduce the compensation that may be recognized under the Savings and Investment Plan and the tax-qualified Pension Plan.

For employees who are not eligible to participate in the pension plan due to the participation freeze on January 1, 2007, the Company contributes a non-elective contribution to the Savings and Investment Plan, up to the IRS Compensation Limits and continues to contribute above the IRS Compensation Limits to this plan.

 

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Table of Contents

This Savings and Investment Plan contribution is based on the combined age and years of service as of January 1 of each year (“points”). For each year, the points are as follows:

 

Points

 

  

Pay Below the Social Security Wage
Base (1)

 

  

Pay in Excess of the Social Security
Wage Base (1)

 

Less than 50

  

3.0%

  

6.0%

50-59

  

4.0%

  

8.0%

60-69

  

5.0%

  

10.0%

At least 70

  

6.0%

  

11.7%

 

(1)

For 2019, the Social Security Wage Base was $132,900.

The ECRIP features include a maximum limit on the amount of interest under the Moody’s Rate that would be recognized (12 percent annualized, or 15.6 percent for amounts eligible to receive 130 percent of the Moody’s Rate), a return of deferral feature whereby an individual could elect to receive a return of the principal amount deferred after a period of at least five years, and options for payment following death, disability or retirement as a lump sum or in monthly installments over 2 to 20 years.

Retirement under the ECRIP is defined as having attained age 55 with at least 10 years of service, or age 65 with at least 5 years of service. If an ECRIP participant’s employment ends due to retirement, death, or disability, amounts deferred to the ECRIP prior to January 1, 2010 will receive interest crediting of 130 percent of the Moody’s Rate. Amounts deferred to the ECRIP after December 31, 2009 are only eligible to receive 100 percent of the Moody’s Rate. During 2019, the Moody’s Rate applied to ECRIP accounts ranged from 3.51 percent to 4.56 percent for amounts eligible for 100 percent of the Moody’s Rate, and 4.56 percent to 5.92 percent for amounts eligible for 130 percent of Moody’s.

If terminated in conjunction with a change-in-control, participants would receive their ECRIP as a lump-sum payment.

The following table sets forth ECRIP account information for each NEO during fiscal year 2019.

 

Name

 

 

Executive
Contributions
in 2019

(1)

 

   

Registrant
Contributions
in 2019

(2)

 

   

Aggregate
Earnings in 2019

 

   

Aggregate
Distributions
in 2019

 

   

Aggregate Balance
at December 31,
2019

(3)(4)

 

 

E. Scott Santi

    $225,115       $78,790       $225,769                 $5,378,476  

Michael M. Larsen

    $67,305       $119,755       $124,825                 $3,242,283  

Christopher A. O’Herlihy

    $955,930       $154,061       $276,174                 $7,276,014  

Steven L. Martindale

    $525,557       $110,485       $249,753                 $6,333,531  

John R. Hartnett

    $185,059       $25,908       $125,771                 $3,065,392  

 

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Table of Contents
(1)

As shown in the Footnote 1 Table below, includes deferrals of (i) 2019 salary reflected in the Salary column of the Summary Compensation Table; (ii) 2019 executive annual incentive amounts deferred in 2020 reflected in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table for 2019; and (iii) 2017-2019 LTI Cash deferred in 2020 reflected in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table for 2019.

Footnote 1 Table

 

Name   Salary
Deferral in
2019
    Executive
Annual
Incentive
Deferral in
2020 for  2019
Performance
    LTI Cash
Deferral in 2020
for Performance
Period of
2017 -2019
    Total
Executive
Deferrals
in 2019
     

E. Scott Santi

 

 

$131,500

 

 

 

$93,615

 

 

 

 

 

 

$225,115

 

 

Michael M. Larsen

 

 

$47,077

 

 

 

$20,228

 

 

 

 

 

 

$67,305

 

 

Christopher A. O’Herlihy

 

 

$314,263

 

 

 

$168,792

 

 

 

$472,875

 

 

 

$955,930

 

 

Steven L. Martindale

 

 

$121,116

 

 

 

$186,191

 

 

 

$218,250

 

 

 

$525,557

 

 

John R. Hartnett

 

 

$134,100

 

 

 

$50,959

 

 

 

 

 

 

$185,059

 

 

 

(2)

These amounts are also included in the All Other Compensation column of the Summary Compensation Table for 2019.

 

(3)

Footnote 4 to the Summary Compensation Table sets forth above-market interest for 2019 included in aggregate earnings in this table. Above-market interest was discontinued for amounts deferred after December 31, 2009.

 

(4)

In addition to the Company’s contributions shown in the table above and excess interest as disclosed for 2019 in the Footnote 4 Table to the Summary Compensation Table, the following amounts of NEO and Company contributions to the ECRIP and excess interest are reported as compensation in the Summary Compensation Table for 2018 and 2017:

Footnote 4 Table

 

Name    Year Ended
December 31, 2018
     Year Ended
December 31, 2017
     

E. Scott Santi

  

 

$382,480

 

  

 

$553,839

 

 

Michael M. Larsen

  

 

$452,889

 

  

 

$735,642

 

 

Christopher A. O’Herlihy

  

 

$1,347,140

 

  

 

$1,195,994

 

 

Steven L. Martindale *

  

 

$875,156

 

  

 

 

 

John R. Hartnett **

  

 

 

  

 

 

 

* Mr. Martindale was not an NEO in 2017.

** Mr. Hartnett was not an NEO in 2018 or 2017.

Potential Payments upon Termination

 

Payments and benefits received by NEOs upon termination are governed by the arrangements described below and quantified at the end of this section. We have estimated the amounts involved assuming that the termination became effective as of December 31, 2019, the last business day of fiscal year 2019. The actual amounts to be paid out can only be determined at the time of the NEOs’ departure from the Company.

No payments or benefits are automatically payable to NEOs upon a change-in-control, and if there is a qualifying termination following a change-in-control, there are no tax gross-up payments.

 

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Annual Executive Incentive Plan

The Executive Incentive Plan (EIP) provides that if a participant is employed as of the last day of the fiscal year, he or she would receive any amounts earned under the Executive Incentive Plan for that fiscal year. In the event an NEO becomes permanently disabled or dies, the NEO would be eligible for a possible payout under the Executive Incentive Plan. If termination of employment other than for death, disability, retirement or change-in-control occurs prior to the last day of the fiscal year, a participant forfeits his or her award; however, the Compensation Committee has the discretion to award an amount prorated for the portion of the fiscal year that the participant was employed. Actual amounts earned based on performance by the NEOs in 2019 are discussed in more detail above in “Compensation Discussion and Analysis — Components of the 2019 Executive Compensation Program — Annual Executive Incentive Plan.”

ITW Retirement Accumulation Plan and Nonqualified Pension Plan

NEOs who are terminated for any reason receive their benefits under the ITW Retirement Accumulation Plan and Nonqualified Pension Plan as described in the Pension Benefits table above.

Executive Contributory Retirement Income Plan

NEOs who are terminated for any reason receive contributions and accumulated earnings as outlined in the Nonqualified Deferred Compensation section above.

Long-Term Incentive Plan Awards

Stock Options: In the event of a termination upon death or disability, all unvested options held by the NEOs would immediately vest. In the event of a termination upon retirement (defined as a combined age and service of 70, subject to a minimum age of 55 and a minimum service of 5 years), 75 percent of stock options granted within one year from the retirement date would be forfeited and the remaining would continue to vest. Additionally, stock options granted more than one year from the retirement date would continue to fully vest. Messrs. Santi, O’Herlihy, Martindale, and Hartnett meet the retirement criteria for the 2017, 2018 and 2019 awards as of December 31, 2019.

PSUs and Performance Cash: In the event of a termination upon death or disability, the awards would vest based on the actual performance level achieved and be paid after the end of the performance period. In the event of a termination upon retirement (defined as a combined age and service of 70, subject to a minimum age of 55 and a minimum service of 5 years), the awards would vest pro-rata and be paid after the end of the performance period. In the event of a change-in-control, an award that is not replaced will vest pro-rata at the greater of target or actual achievement level. In the event of an actual or constructive termination following a change-in-control, an award that has been replaced would vest pro-rata and be paid at the target level (or actual achievement level if greater).

In the event of a change-in-control, long-term incentives that are continued or replaced would only vest upon a termination of employment after the change-in-control. All long-term incentives that are not replaced would fully vest. In the case of PSUs and Performance Cash, all such vesting events are subject to the achievement of performance goals.

For all NEOs, in the event of a termination other than upon retirement, death, disability or a change-in-control, any unvested options, PSUs, and Performance Cash held on such date by the NEOs would be forfeited.

 

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Change-in-Control Severance Policy

The Company’s 2011 Change-in-Control Severance Compensation Policy provides that, upon an actual or constructive termination following a change-in-control of the Company, the NEOs and other elected officers would be entitled to receive: (i) two times annual cash compensation (base salary plus average annual incentive pay over the prior three years); (ii) a prorated amount of that year’s annual incentive bonus at the target level (or actual achievement level if greater); and (iii) a prorated amount of the value of Performance Cash awards at the target level (or actual achievement level if greater). We do not gross up any of the compensation paid in the event of termination due to a change-in-control.

 

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Summary of Termination and Change-in-Control Provisions

 

The benefits for the NEOs under each termination scenario are outlined below.

 

Benefit or Payment   Retirement  

Involuntary

 (w/o Cause) 

 

Death/

 Disability 

 

Termination in

Connection with a

Change-in-Control

Base Salary

 

N/A

 

1 week per


year of

service

 

N/A

 

2 times annual salary

Benefits

 

N/A

 

Based on


years of

service

 

N/A

 

N/A

Executive Incentive Plan (1)(2)

 

Pro-rata vesting

 

Pro-rata


payout

 

Pro-rata vesting

 

2 times the average bonus paid in the prior 3 years plus pro-rata payout for current year

Executive Contributory Retirement Income Plan (1)

 

Yes

 

Yes

 

Yes

 

Yes

Retirement Accumulation Plan and Nonqualified Pension Plan (1)

 

Yes

 

Yes

 

Yes

 

Yes

Vesting of Unvested Stock Options

 

If retirement is 1 year or more after award, continue vesting; if less than 1 year, 25 percent vests and 75 percent is forfeited (3)

 

N/A

 

100 percent


vesting

 

Subject to replacement and double trigger (5); otherwise, 100 percent vesting

Payment of Long-Term Cash (LTI Cash, Performance Cash) and PSUs (2)(3)

 

Pro-rata vesting (4)

 

N/A

 

100 percent


vesting (4)

 

Subject to replacement and double trigger (5); otherwise, pro-rata amount based on termination date (6)

 

(1)

Retirement for these awards is defined as termination after age 55 and 10 years of service.

 

(2)

All vesting for these awards is subject to achievement of performance goals, except for termination upon death or disability.

 

(3)

Retirement is defined as a combination of age and service of 70 with a minimum age of 55 and minimum service of 5 years.

 

(4)

Vesting is limited to the extent that the performance level for the award is achieved. If the minimum performance level is not achieved, the award is forfeited.

 

(5)

Awards that are replaced after a change-in-control do not receive accelerated vesting. Double-trigger vesting occurs for awards that are continued or replaced if actual or constructive termination occurs within two years of a change-in-control of the Company.

 

(6)