The Compensation Committee (the "Committee") of the Board of Directors establishes and administers the Company's executive compensation programs. The Committee is comprised of five non-employee members of the Board, Messrs. Petersen, Biggs, Perry, Pigott and Weyerhaeuser. Messrs. Biggs and Perry became members of the Committee on August 1 and November 1, 1997, respectively.
The goals of the Company's integrated executive compensation programs are to
The full Board of Directors reviews the Committee's recommendations and approves the salaries of all elected officers, including those named in the Summary Compensation Table on page *. The Committee reviews the recommendations of the Company's Chief Executive Officer for the salaries of all nonelected officers and is responsible for all other elements of executive compensation, including annual and long-term incentive awards.
Boeing executive officers are assigned to pay grades, each with an established salary range, a percentage of salary that is a norm for the annual incentive award, and a factor of salary on which long-term incentive awards are based. Assignment to a pay grade is determined by comparing individual responsibilities with industry survey data and internal executive job relationships. It is the Committee's objective to maintain a competitive compensation structure for Boeing executives.
The Committee annually reviews the salary levels of executive officers using data provided by an outside consulting firm, and compares Boeing salaries with those for comparable jobs in major aerospace and other large industrial corporations. These companies are selected on the basis of their comparable size and operating performance, and include approximately half of the aerospace and defense companies in the Standard & Poor's ("S&P") Aerospace Index used in the performance comparison graphs on page *. Boeing executive officer salary levels for 1997 were targeted for the median of salaries of corresponding positions at the benchmark companies.
Executive officer salary adjustments are determined by a subjective evaluation of individual performance, by comparisons to peers inside and outside the Company and, with respect to one of the Named Executive Officers, by the terms of an employment agreement. Survey data indicate that the 1997 base salaries of the Named Executive Officers, including Mr. Condit, are on average at or slightly below the median of the benchmark companies.
Annual Incentive Awards
Annual incentive awards are designed to focus management attention on Company performance. Each executive pay grade has an assigned incentive award percentage (which is a percentage of annual salary). That percentage is adjusted based on Company, operating group, and individual performance. The incentive award percentages assigned to the Named Executive Officers' pay grades range from 60% to 80% of salary. The actual incentive award an executive officer is eligible to receive can range from zero to two times the incentive award percentage assigned to that officer's pay grade. Annual incentive awards for 1997 were paid out approximately 70% in cash and 30% in Boeing Stock Units ("BSUs"), which are discussed below, except that the awards granted to certain former McDonnell Douglas executives were paid entirely in cash.
Cash Awards. The cash portion of the incentive awards approved by the Committee was determined based on the officer's target incentive award, adjusted based on evaluation of Company and operating group performance, coupled with a subjective evaluation of individual performance. The resulting performance evaluation produces a percentage factor that may increase or decrease the incentive awards for an executive officer.
In 1997, Company performance was evaluated based on the Company's overall profitability and growth, measured by shareholder value over the long term, together with quality as measured by customer, employee, and community satisfaction.
Shareholder value is indicated by performance comparisons with S&P Aerospace Index companies, the S&P 500 Stock Index, and a select group of premier companies. In addition to comparison of the relative shareholder return performances on this basis, the Committee's final evaluation of Company performance included subjective and internal analysis of the reasons for changes in the Company's shareholder value.
With regard to the Company's long-term shareholder value measurements, for the five-year period 12/31/92 through 12/31/97, the Company outperformed the S&P 500 but lagged the S&P Aerospace Index and failed to rank among the top 50% of the selected premier companies. For the ten-year period 12/31/87 through 12/31/97, which included both an upcycle and a downcycle in the commercial aircraft market, the Company outperformed both the S&P Aerospace Index and the S&P 500, and was in the top quartile of the selected premier companies.
For 1997, the Committee's assessment was that quality performance by the Company, as a whole, was below expected levels due to difficulties in meeting commitments to customers in the commercial airplane business.
Operating group performance was evaluated primarily on the group's performance against its goals as to (a) cost performance, (b) profit contribution, (c) market share or new product orders, and (d) progress on major initiatives, such as strategic planning and implementation, process improvements, and employee relations and development.
For 1997, the Committee assessment was that, while the operating groups performed well in obtaining new business in both commercial airplane and defense and space markets, cost performance and profit contribution goals were not met in the commercial airplane business, as a result of production problems associated with a rapid increase in production rates. Process improvement objectives in the commercial airplane business were also hampered by production problems.
Total 1997 annual incentive awards for the named executive officers other than Mr. Condit, based on the foregoing assessments and an employment agreement with one of the Named Executive Officers, averaged 96% of their assigned percentages. Mr. Condit's award was 81% of his assigned percentage. The cash portion of Mr. Condit's annual incentive award was based on the Committee's assessment of his leadership and overall contributions to the Company's operating performance, integration of both the Company's Merger with McDonnell Douglas and acquisition of the aerospace and defense units of Rockwell, product quality, and customer satisfaction. The cash portion of each incentive award is shown in the Bonus column of the Summary Compensation Table on page *.
Boeing Stock Units. Boeing Stock Units are restricted Boeing common stock units without voting rights but earning dividend equivalents. The number of BSUs awarded was determined by crediting each executive with the number of shares that could be purchased with 30% of that officer's target incentive award, adjusted for Company performance, based on the Fair Market Value of Boeing common stock on the day of the award. The BSUs vest three years after the award and each executive may choose to have them paid out in either shares of Boeing common stock or cash. The values of the BSUs at the time of grant to Mr. Condit and the other Named Executive Officers are shown in the Restricted Stock column of the Summary Compensation Table on page *.
Features of the 1998 Executive Compensation Program
Following the Merger with McDonnell Douglas, the Committee undertook a comprehensive study, with the assistance of a compensation and benefits consulting firm, to review the Company's executive compensation program. The purpose of the study was to ensure that the compensation programs for the expanded executive group reflect the Company's compensation policies and objectives, integrate all executives into a common compensation structure for 1998, and strengthen the alignment of executive interests with those of shareholders.
As a result of its study, the Committee determined that the general structure of the Company's current base salary and annual incentive compensation programs continues to be appropriate, but it approved a new performance-based long-term incentive compensation program that ties executive rewards more directly to the increase of shareholder value through stock price growth. This new program awards Performance Shares of Boeing common stock to executives contingent on attaining shareholder return goals within a specific time period. The new program also awards Career Shares of Boeing common stock that are contingent on the executive's staying with the Company for the remainder of his or her career. The Committee also issued guidelines and incentives for executive ownership of Company common stock.
The new Performance Share program provides a greater incentive for executives to create and maintain shareholder value through stock price growth than the Company's prior executive stock option program and other executive incentive programs in most comparable companies. Like the option program, the Performance Share program focuses executives on stock price appreciation. However, the Performance Share program requires a minimum compound average annual increase in share price of 10% within a five-year period before any gains can be realized.
The 1998 awards are contingent on the Company's achieving a minimum, target, and superior stock price appreciation during a five-year performance cycle. Specifically, the vesting of 1998 Performance Share awards is contingent on the Company's stock price appreciating to a minimum, target, and superior average price of $81.63, $97.59, and $101.95, respectively, within five years from the date of grant. The minimum performance hurdle equates to a 60% increase in stock price and would add approximately $30 billion to the Company's market value. The Performance Shares will be paid in Boeing common stock on the date the specified performance hurdles are met. The Performance Shares will earn dividend equivalents, which will be accrued in the form of additional Performance Shares and paid in Boeing common stock when and to the extent that the related Performance Shares are paid.
The total number of shares delivered by the end of the five-year cycle will range from zero to 125% of the contingent grant. If the minimum price is achieved, 25% of the Performance Shares will vest. If stock price milestones between minimum and target are met, the Performance Shares will vest in increments of 40%, 55%, and 75%, up to 100% if the target price is achieved and 125% if the maximum price is achieved. In the event the Company's stock price does not achieve the specified performance hurdles, the Committee may, in its discretion, allow vesting of up to 100% of the target Performance Shares if the Company's total shareholder return ("TSR" — stock price appreciation plus dividends) during the five-year performance period exceeds the average TSR of the S&P 500 over the same period.
To implement the new long-term incentive program, the Board of Directors has approved and is submitting for shareholder approval an amendment to the Company's 1997 Incentive Stock Plan for Employees that will remove the limitation on the number of shares available for performance-based restricted stock awards. See Proposal 2: Approval of Amendment of The Boeing Company 1997 Incentive Stock Plan for Employees on page *.
The long-term incentive program also includes grants of Career Shares to certain executives who make substantial contributions to the management, growth, and success of major components of the Company's business. Career Shares are stock units whose payout in Boeing common stock is contingent on the participant's staying with the Company until retirement. Career Shares will earn dividend equivalents, which will be accrued in the form of additional Career Shares and paid in Boeing common stock when and to the extent the related Career Shares are paid. To recognize the different levels of responsibilities within the Company, the number of Career Shares an executive is granted will be based on the executive's pay grade and salary and the price of Boeing common stock. The number of Career Shares granted will be subject to discretionary adjustments based on individual performance or for purposes of retention.
The Committee has also established new stock ownership guidelines for executives that range from one to six times annual base salary, and from three to six times for the named executive officers. As an incentive to encourage and facilitate stock ownership, the Company will match any deferral of Performance Shares, salary (up to 50%), annual cash incentive awards, or BSUs into an unfunded stock unit account within the Company's Deferred Compensation Plan with a matching contribution of an additional 25% of stock units.
The Committee believes that the new Performance Shares, Career Shares, stock ownership guidelines, and deferral match will more effectively promote the Company's overall philosophy of aligning executive and shareholder interests.
Beneficial stock ownership is a fundamental principle underlying the philosophy and structure of Boeing's compensation programs for all employees. Ownership ensures alignment with the interests of shareholders and reinforces the Company's mission of people working together as one global company for aerospace leadership. The Company's approach to compensation design through such programs as the executive Performance Share program and employee ShareValue Program focuses all employees on continuously growing shareholder value.
Boeing executive compensation programs are designed to provide awards based on Company, operating group and individual performance. To the extent consistent with this performance-based approach and the Company's ability to provide competitive compensation, the Committee's policy is generally to provide executive compensation that is fully deductible by the Company for income tax purposes. In 1997, all the compensation paid to the Named Executive Officers (other than certain amounts paid by McDonnell Douglas prior to the Merger) was fully deductible by the Company. The Performance Shares described above are not designed to qualify as performance-based compensation that is fully deductible by the Company for income tax purposes.