What are the main changes to Lockheed Martin's executive compensation for 2006?

The company is shifting the timing of base salary reviews to the first quarter, aligning it with annual incentive awards. More significantly, the long-term compensation strategy is being diversified to include Restricted Stock Units (RSUs) and Long-Term Incentive Performance (LTIP) awards, in addition to stock options. This is partly to address new accounting rules for stock options and reduce earnings dilution.

How are annual bonuses determined under the MICP?

Bonuses are determined based on the Committee's assessment of performance against both individual and organizational goals. Corporate performance is evaluated using measures like orders, sales, earnings, cash generation, return on invested capital, contract performance, and new business won. Individual performance is also assessed based on pre-established goals, ethics, customer satisfaction, and teamwork. Payouts can range from 0% to 195% of the targeted bonus percentage.

What is the performance criteria for the new LTIP awards for 2006?

For the 2006-2008 performance period, LTIP awards will be based on a 50-50 weighting between external and internal performance factors. The external factor is the Corporation's total stockholder return compared to the S&P Industrials Index. The internal factors are the change in the Corporation's return on invested capital (ROIC) and its cash from operations.

Why is Lockheed Martin including RSUs in its long-term compensation mix?

Lockheed Martin is incorporating RSUs into its long-term compensation strategy due to changes in accounting rules that require stock options to be expensed starting January 1, 2006. The company also notes that RSUs are generally less dilutive to earnings compared to stock options, and they are incorporating performance-based vesting for RSUs to align with financial goals.

LMT 8-K: Material Agreements

Summary

This 8-K filing by Lockheed Martin Corporation (LMT) on February 2, 2006, details significant changes and affirmations regarding its executive compensation practices, effective February 27, 2006. Key updates include a shift in the timing of base salary reviews to the first quarter, aligning with annual incentive compensation awards. The report also outlines the company's Management Incentive Compensation Plan (MICP), which bases bonuses on both organizational and individual performance, with potential payouts ranging from 0% to 195% of targeted percentages. This information is crucial for investors seeking to understand the drivers and structure of executive pay at LMT. Furthermore, the filing announces a notable evolution in the long-term compensation strategy for 2006. Lockheed Martin is diversifying its long-term incentives beyond stock options to include Restricted Stock Units (RSUs) and Long-Term Incentive Performance (LTIP) awards. This move is partly in response to new accounting rules requiring stock options to be expensed and aims to reduce earnings dilution. The RSU awards now incorporate performance-based vesting tied to cash flow, while LTIP awards for 2006 will be based on a combination of external (total stockholder return vs. S&P Industrials Index) and internal (return on invested capital and cash from operations) performance metrics. This strategic shift in executive compensation aims to better align executive interests with shareholder value creation and manage compensation-related expenses.

Key Highlights

1Lockheed Martin is adjusting its executive compensation structure, with base salary reviews moving to the first quarter of each year, starting in 2006.
2The company's annual incentive compensation plan (MICP) allows for bonuses between 0% and 195% of target, based on corporate and individual performance.
3For 2006, Lockheed Martin is shifting its long-term compensation strategy to include a mix of stock options, Restricted Stock Units (RSUs), and Long-Term Incentive Performance (LTIP) awards.
4The move to include RSUs is partly driven by new accounting rules requiring stock options to be expensed starting January 1, 2006, and aims to reduce earnings dilution.
5RSU awards for 2006 will feature performance-based vesting tied to cash flow and the company's financial performance.
6LTIP awards for the 2006-2008 performance cycle will be based on a combination of total stockholder return relative to the S&P Industrials Index and internal metrics like return on invested capital and cash from operations.
7The company had previously noted that no LTIP awards were paid for the 2003-2005 performance cycle due to not meeting performance criteria relative to the S&P 500.

LOCKHEED MARTIN CORP 8-K Report, Material Agreement (Feb 2, 2006)

Summary

Key Highlights

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