The Compensation Committee (the "Committee") of the Board of Directors establishes and administers the Company's executive compensation programs. During 2003, the Committee was composed of five nonemployee members of the Board, Messrs. Bryson, Duberstein, Gray, McDonnell and Platt, all of whom are independent directors under the NYSE listing standards. Ms. Ridgway was appointed a member of the Committee in February 2004 and therefore does not appear as a signatory to the Committee's report. Executive Compensation Policy Under the direction of the Committee, the Company will manage a company-wide executive compensation program to reinforce the importance of a strong executive team moving in a common direction to create shareholder value while striving toward the Company's vision: "People working together as a global enterprise for aerospace leadership." The goals of the Company's executive compensation programs are to:
Consistent with our governance principles and recently adopted NYSE listing standards, the Committee directly engaged an independent consultant to advise the Committee regarding various issues associated with the Company's executive compensation program and practices. Executive Pay Structure Boeing executive officers are assigned to pay grades, determined by comparing individual responsibilities with industry survey data and internal executive job relationships. Each pay grade has an established salary range, a percentage of salary that establishes a target award for the annual incentive, and a factor of salary on which longterm incentive awards are based. Using compensation survey data, adjusted for company size, Boeing targets its executives' pay at competitive levels of comparable jobs in benchmark companies, which include major aerospace and other large corporations (the "peer group"), based on consideration of job responsibilities, skills, experience and other factors. A peer group is selected annually by the Committee and is used to benchmark pay levels. The 2003 peer group was selected based upon the following criteria: competitor, size, technology focus, global operations and diversified business. Application of these selection criteria resulted in a peer group representing a cross section of leading companies, spanning 10 S&P industry sectors, with annual sales and market capitalizations comparable to Boeing. The peer group includes five of the aerospace and defense companies in the S&P 500 Aerospace & Defense Index used in the performance comparison graph. Base Salaries Base salaries recognize individual competencies, skills, experience and sustained performance. Executive officer salaries are determined by an evaluation of individual performance and by objective comparisons to internal peer data and external market data for similar positions. Annual Incentives Annual incentive awards focus management attention on annual Company performance. Actual award payments also reflect an evaluation of individual performance. Each executive pay grade has an assigned incentive target award. The incentive target award percentages assigned to the Named Executive Officers range from 85% to 100% of salary. Executive bonuses are paid in a combination of cash and Boeing Stock Units ("BSUs"). For the current Named Executive Officers the incentive awards for 2003 performance were paid out approximately 60% in cash and 40% in BSUs. Annual Incentive Award Determination. Specifically, each officer's incentive award is determined based on Company performance against pre-established economic profit goals and is modified up or down based on individual performance. Economic profit reflects operating profit less the cost of capital, and includes adjustment for certain non-recurring items. The Committee determined that the Company's performance against these preestablished economic profit goals for 2003 resulted in a score of 0.80, which was above the threshold of 0.50 but below the target of 1.00. Boeing Stock Units. BSUs are restricted stock units without voting rights but earning dividend equivalents. BSUs vest three years from the date of the award. The values of the BSUs at the time of grant to the Named Executive Officers are shown in footnote 4 to the .Summary Compensation Table. Long-Term Incentives Long-term incentives, in the form of equity, recognize executive impact level, commitment and corporate success in creating shareholder value. Since 1998, the Company has followed FAS 123, which requires the Company to recognize a charge to earnings for the "fair value" cost of all stock-based employee incentive compensation awards. Performance Shares. Executives are awarded Performance Shares, which are rights to receive Boeing stock contingent on the Company's attaining shareholder return goals within a five-year time period. These performance goals represent rates of stock price appreciation from the time the Performance Shares are granted. The Committee establishes the terms for Performance Share grants based on business expectations, market conditions and compensation philosophy. For the 1999 Performance Share grant, 75% of the target share award opportunity vested based upon the achievement of specified stock price appreciation goals over the 1999-2004 performance period. The remaining 25% expired unvested in February 2004. The terms of the Performance Shares granted to the Named Executive Officers are described in the Long-Term Incentive Plans. Career Shares. The long-term incentive program also includes grants of Career Shares to senior executives. Career Shares are units of Boeing stock paid upon retirement from the Company. Career Shares earn dividend equivalents, which accrue in the form of additional Career Shares and which will be distributed in Boeing stock when and to the extent the Career Shares are distributed. The values of the Career Shares at the time of grant to the Named Executive Officers are shown in footnote 4 to the Summary Compensation Table. Other Compensation In addition to base salary, annual and long-term incentive award opportunities, the Company also provides its executive officers with benefits and perquisites targeted to competitive practices. Executive officers are eligible to participate in Company-provided retirement plans (see "Pension Plans") and the Boeing Deferred Compensation Program. The Deferred Compensation Program provides executives an opportunity to defer up to 50% of base salary, any annual incentive awards and vested Performance Shares into an interest-bearing account (credited annually with interest based on a AA Bond yield) or Boeing deferred stock units (an unfunded stock unit account). In order to encourage long-term stock ownership (see "Stock Ownership") if Boeing deferred stock units are elected, the Company provides a 25% matching contribution which is restricted from withdrawal until an executive's retirement. The values of matching deferred stock units, at the time of grant, to the Named Executive Officers are shown in footnote 4 to the Summary Compensation Table. The Company has an Executive Layoff Benefit Plan, which covers all executives and provides severance benefits equal to one year's base salary plus annual incentive in the event an executive's job is eliminated. The Company does not have employment agreements with the Named Executive Officers. In 2003, executive officers received the following perquisites: access to the Company's plane for business purposes and, in some cases, personal usage; company provided leased vehicles, first class air travel, financial services allowance and an annual physical exam. The Committee reviewed the competitiveness and appropriateness of these offerings, in consultation with the independent consultant, and determined this package of benefits and perquisites is consistent with Boeing's executive compensation policy and market practices. Chief Executive Officer Compensation Effective December 1, 2003, Phil Condit resigned as Chairman and Chief Executive Officer and a new leadership structure was implemented. Lewis Platt was named Non-Executive Chairman and Harry Stonecipher was named President & CEO. Mr. Condit remained an employee of the Company until his retirement effective March 1, 2004. Mr. Stonecipher's annual base salary was set at $1,500,000, based on consideration of competitive practices among the peer group. For 2003, Mr. Stonecipher was awarded a prorated annual incentive award on the terms described above under "Annual Incentives" of 120% of base salary, based on his significant contributions during the remainder of 2003. No long-term incentives were awarded to Mr. Stonecipher in 2003 as he was not an employee at the time of grant. Upon his re-hire, Mr. Stonecipher was eligible for the benefits and perquisites available to executive officers as outlined under "Other Compensation." Mr. Condit's annual base salary was $1,560,000 and he was awarded an annual incentive award on the terms described above under "Annual Incentives" of 64% base salary, based on 2003 economic profit results. In February 2003, Mr. Condit also received Performance Share and Career Share awards consistent with the guidelines outlined under "Long-Term Incentives." In addition, he was eligible for the benefits and perquisites available to executive officers as outlined under "Other Compensation." Stock Ownership Stock ownership is a fundamental principle underlying the philosophy and structure of the Company's compensation programs. Stock ownership for executives promotes alignment of their interests with those of shareholders. The Committee has established stock ownership guidelines for executives that range from one to six times annual base salary, and from four to six times base salary for the Named Executive Officers. All of the Named Executive Officers meet or exceed their guidelines. As a further incentive to encourage long-term stock ownership, the Company provides a 25% matching contribution on deferred earned compensation. These matching shares are restricted from sale until retirement, as outlined under "Other Compensation." Tax Deductibility of Compensation Section 162(m) of the Internal Revenue Code of 1986, as amended, imposes a $1 million limit on the amount that a publicly traded corporation may deduct for compensation paid to a Named Executive Officer who is employed on the last day of the fiscal year. "Performance-based compensation" is excluded from this $1 million limitation. The Committee's policy is to provide annual incentive awards that are fully deductible by the Company for income tax purposes. In 2002, the Committee modified the Performance Share program so that future Performance Share grants will be deductible by the Company under Section 162(m). Performance Shares granted prior to 2003 are not deductible. In addition, the Company has a salary and incentive award deferral plan that permits compensation deferred under the plan by Named Executive Officers to be exempt from the limit on tax deductibility.
The following graph compares the cumulative total shareholder return on $100 invested at year-end in 1997 in Boeing stock, Standard & Poor’s 500 Stock Index and Standard & Poor’s 500 Aerospace & Defense Index. The investment values are based on share price appreciation plus dividends paid in cash, assuming that dividends were reinvested on the date on which they were paid. The stock price performance shown in the graph is not necessarily indicative of future price performance. Return to Shareholders
The following table sets forth the annual and long-term compensation of the Company's Named Executive Officers ("NEOs"), including the Company's former Chairman and Chief Executive Officer. Annual compensation includes amounts deferred at the officer's election. All numbers are rounded to the nearest dollar or whole share.
The following table shows the aggregate number and value of BSUs granted to each of the NEOs in 2004 for service in 2003, and the number and value of Career Shares and matching deferred stock units granted to each of them in 2003. The values are based on the closing market price of Boeing stock on the dates of grant. No RSUs were granted to the NEOs in 2003.
The following table shows the aggregate number and value of BSUs, RSUs, Career Shares, matching deferred stock units, LTIP Shares granted under the Company's previous long-term incentive plan, and other shares of restricted stock or RSUs held by each of the NEOs at year-end, plus the BSUs awarded in 2004. The value of all such shares and units is based on the closing price of Boeing stock on December 31, 2003, which was $42.14 per share, except for the BSUs granted in 2004, whose value is based on the closing price of the stock on February 23, 2004, which was $43.62.
The table below sets forth information with respect to the number and potential realizable value of individual grants of stock options granted to NEOs in 2003.
The table below also sets forth information with respect to the number and assumed value of outstanding options held by the NEOs at year-end.
The Performance Share program is designed to focus executives on stock price appreciation by requiring a minimum annual increase in share price within a five-year period before any awards can be paid. The 2003 Performance Share awards are contingent on the Company's achieving threshold, target and maximum stock prices of $42.38, $60.54 and $68.11, respectively, within five years from the date of grant. The grant date share price of Boeing stock for purposes of the 2003 Performance Share awards was $30.27 (the average daily closing of a share of Boeing stock on the NYSE over a 20-consecutive-day period ending on the date of grant). Performance Shares vest at such time as the average daily closing price of a share of Boeing stock on the New York Stock Exchange over a 20-consecutive-day period achieves a specified hurdle. The Performance Shares will be distributed in Boeing stock on the date the specified performance hurdle is met. The Performance Shares earn dividend equivalents, which will be accrued in the form of additional Performance Shares and distributed in Boeing stock when and to the extent that the related Performance Shares are distributed. The total number of shares delivered by the end of the five-year cycle will range from zero to 125% of the contingent grant.
The following table shows the estimated annual pension benefits payable to an executive officer, assuming retirement on January 1, 2003, at age 65 after selected periods of service. Total pension benefits for executive officers are determined under the Company’s Supplemental Executive Retirement Plan (the “SERP”), which is an unfunded, unqualified, defined benefit plan. A portion of that benefit will be paid under the Company’s Pension Value Plan, which is a qualified defined benefit plan whose benefits are limited by applicable federal tax laws and regulations. The remainder of the benefit will be paid under the SERP. The benefits shown in the table are based on straight-life annuity amounts. The plans also permit selection of a joint and survivor annuity with reductions in the benefits shown. The benefits shown in the table are not subject to any deduction for Social Security benefits.
Credited service begins on the commencement of employment. As of December 31, 2003, the following NEOs have the indicated years of credited service: James F. Albaugh, 19.5; Alan R. Mulally, 34.5; David O. Swain, 39.5; Laurette T. Koellner, 26.0; Harry C. Stonecipher 15.5; and Philip M. Condit, 38.5. Mr. Stonecipher's service reflects the terms of an employment agreement that applied to his first period of employment. Under that agreement, he received credit for twice as many years of service as he actually worked for the Company. Under the SERP, pension benefits are based on years of credited service times 1.6% of average annual salary plus average annual incentive compensation for the last five years of employment. Benefits calculated under the SERP are limited to 100% of a participant's annual salary at termination and are reduced by the amount of benefits received under the Pension Value Plan.l The total annual averages for the following NEOs are as follows: James F. Albaugh, $1,122,630; Laurette T. Koellner, $688,937; Alan R. Mulally, $1,593,378; and David O. Swain, $932,081. Mr. Condit, upon his retirement effective March 1, 2004, had an annual benefit of $1,419,600. Had Mr. Mulally attained age 65 and retired on January 1, 2004, his benefit calculated under the SERP formula would have exceeded his annual salary by approximately $86,000 per year. Had Mr. Swain attained age 65 and retired on January 1, 2004, his benefit calculated under the SERP formula would have exceeded his annual salary by approximately $10,000 per year. Because the SERP limits pension benefits to 100% of annual salary, Mr. Mulally's and Mr. Swain's benefits would have been reduced accordingly. Mr. Albaugh's and Ms. Koellner's benefits have not exceeded the SERP limit and would therefore not have been reduced. Upon his original retirement on June 1, 2002, Mr. Stonecipher began receiving his annual retirement benefit of $631,000. This amount is included in Mr. Stonecipher's "All Other Compensation" in the Summary Compensation Table. Mr. Stonecipher will continue to receive his benefit during his current period of employment. He will also earn additional service under the Pension Value Plan and the SERP. However, future accruals under the SERP will be partially offset by the value of payments Mr. Stonecipher receives prior to his retirement, including amounts he has already received. The amount of his additional annual benefit is expected to range between $25,000 and $40,000 for each year that he works.
Executive Layoff Benefit Plan. The Boeing Executive Layoff Benefit Plan (the "Plan") is an ongoing layoff benefits program for executives who are involuntarily laid off from the Company. The Plan is intended to constitute a welfare benefit severance plan under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Plan is unfunded and paid directly from the general assets of the Company. Benefits under the Plan are provided when an executive-level position is eliminated by the Company, the executive does not become employed elsewhere within the Company, and the executive is involuntarily laid off. In addition, if the scope, duties, or responsibilities of an executive position have changed significantly, and the position is no longer evaluated as an executive-level position, then the executive position is deemed eliminated and the key executive is eligible for benefits under the Plan, unless the executive either (a) accepts a position within the Company (including a nonexecutive position) or (b) rejects an executive-level position offer. Eligible participants under the Plan receive a layoff benefit equal to: one year of base salary at the time of layoff, plus the employee's annual target incentive compensation, multiplied by the Company's actual performance score for the year during which the layoff event occurs, minus, if applicable, the total of all payments made, or to be made, pursuant to any individual employment, separation or severance agreement. The Plan is administered by the Compensation Committee of the Board of Directors.
In 2003, a subsidiary of the Company, Boeing Management Company ("BMC"), entered into a license agreement providing Bugeye Technology, Inc. ("BTI") rights to use the Company's patents and technology related to certain advanced video display technologies (the "Bugeye technologies") in exchange for aggregate five-year minimum license fees and annual royalty payments of $4,450,000 based on sales made by BTI. In the same transaction, BMC also assigned the Bugeye trademark to BTI in exchange for 102,365 shares of BTI Series A preferred dividend stock at $0.411 per share. BTI was formed through the Company Chairman's Innovation Initiative ("CII") program. Douglas A. Swain, who serves as the President of BTI is the son of David O. Swain, the Company's Executive Vice-President and Chief Operating Officer, Integrated Defense Systems. David O. Swain recused himself from any involvement in the transaction and any dealings with BTI so long as he is an employee of the Company. The Company believes that the terms of this transaction were consistent with market conditions.
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