Annual Incentive Plan and Incentive Compensation Plan



 Exhibit 10.3 
 NORTHROP GRUMMAN 2006 ANNUAL INCENTIVE PLAN 
 AND 
 INCENTIVE COMPENSATION PLAN (for NON-SECTION 162(m) OFFICERS) 
 SECTION I 
 PURPOSE 
 Northrop Grumman has an annual incentive program to promote the success of the Company and render its operations profitable to the maximum extent by providing incentives to key employees. Participating employees have varying degrees of
impact on the overall success and performance of the Company. To facilitate the appropriate incentive level for each Participant, Northrop Grumman utilizes two incentive plans that use common financial and business performance criteria: 

 

	 	•	 	The Incentive Compensation Plan (ICP) 

  

	 	•	 	The Annual Incentive Plan (AIP) 

 SECTION II 
 DEFINITIONS 
  

	1.	Company—Northrop Grumman Corporation and such of its subsidiaries as are consolidated in its consolidated financial statements. 

  

	2.	Code—The Internal Revenue Code of 1986, as amended from time to time. 

  

	3.	Committee—The Compensation and Management Development Committee of the Board of Directors of the Company. 

  

	4.	Incentive Compensation—Awards payable under these plans. 

  

	5.	Participant—An employee of the Company granted or eligible to receive Incentive Compensation award under one of these Plans. 

  

	6.	Performance Criteria—The performance criteria is a weighted combination of various financial and non-financial factors approved by the Committee for the Performance Year.


  

	7.	Performance Year—The year with respect to which an award of Incentive Compensation is calculated and paid. 

  

	8.	Plans—Collectively, the Incentive Compensation Plan (ICP); and/or the Annual Incentive Plan (AIP). 

  

	9.	Plan Year—The fiscal year of Northrop Grumman Corporation. 

  

	10.	Section 162(m) Officer—An employee who is a “covered employee” as defined in Section 162(m) of the Code with respect to an award of Incentive Compensation
under the 2002 Incentive Compensation Plan for any Performance Year. 

 SECTION III 
 PARTICIPATION 
 Employees may be eligible for incentive
compensation under one of the Northrop Grumman incentive plans as described below. 
  

	1.	Incentive Compensation Plan (ICP): 

  

	 	a.	 Employees eligible to receive incentive compensation under the ICP are elected corporate officers of the rank of vice president and above and the presidents of
those consolidated subsidiaries that the 



  

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committee determines to be significant in the overall corporate operations that are not section 162(m) officers for the performance year. If an executive
receives or is eligible to receive an incentive compensation award under the 2002 Incentive Compensation Plan for 162(m) officers, then the executive will not be eligible and shall not receive an incentive compensation award under the ICP.



  

	 	b.	Directors, as such, shall not participate in the ICP, but the fact that an elected corporate officer or subsidiary president is also a director of the Company shall not prevent
participation. 

  

	2.	Annual Incentive Plan (AIP): 

  

	 	a.	Employees eligible to receive incentive compensation awards under the AIP are appointed vice presidents, senior management, middle management and individual key contributors
(employees normally in a position that customarily perform quasi-management or team leadership duties). In addition, employees may be eligible to participate in the AIP if they have specific individual goals that directly contribute to the
attainment of their respective business unit’s operating goals or if employees are considered “high performing” and are in a position to make measurable and significant contributions to the success of the Company.


  

	 	b.	At the beginning of, or prior to, a performance year, the Company’s CEO approves the number of participants eligible for participation in the AIP. Participants are then
selected by their management based on an assessment of their position relative to other candidates, their performance, and their potential impact on achievement of business unit and the Company goals. 

  

	 	c.	Participation in the AIP during any performance year does not imply nor guarantee participation in the AIP in future years. 

  

	3.	Non-Duplication of Awards 

  

	 	a.	A participant may not receive an incentive compensation award under more than one of the above plans for the performance year. The only exception to this is in the event that an
individual is a participant in a particular plan for a portion of the performance year and then is selected to participate in one of the other plans for the remainder of that performance year. In this event, an individual may receive pro-rated
awards based on the time that he/she participated in each plan. 

  

	 	b.	A participant will not be eligible to receive any incentive compensation award from either of these plans if the employee is a participant in the Company’s 2002 Incentive
Compensation Plan for 162(m) Officers. 

  

	4.	Death, Disability, or Retirement 

 A participant may be
eligible to receive a pro-rated incentive compensation award in the event of the employee’s death, disability, or retirement. In the case of a deceased participant, such incentive compensation award will be paid to the participant’s
estate. 
  

	5.	Employment Status 

 Except as provided in Section III 4
(see above), in order to be eligible to receive a payment from these plans, a participant must be an active employee of the Company as of December 31 of the plan year, unless an exception is approved in writing by the Company’s chief human
resources and administrative officer. 
  

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 SECTION IV 
 GOAL SETTING AND PERFORMANCE CRITERIA 
 Goal setting and performance planning are essential elements of plan administration.
This requires establishing performance criteria, such as annual goals, goal weights, and performance measures. Except as provided in the plan, the Committee approves annual business and financial goals for the Company no later than the end of the
first quarter of the annual performance period. 
  

	1.	Corporation Goals 

 For each performance year, until
otherwise determined by the Committee, financial and non-financial objectives will be established by the Committee in its sole discretion. 
  

	2.	Financial Measures 

  

	 	a.	The CEO’s recommended goals are reviewed and amended as appropriate, and established by the Committee at its sole discretion. Measures may include, but are not limited to: cash
management, cash flow, return on investment, debt reduction, revenue growth, net earnings, and return on equity. 

  

	 	b.	The Committee approves a performance threshold, a target level and a maximum performance level for each of the financial measures for the performance year. 


 

	3.	Supplemental Goals 

 Supplemental goals may be either
qualitative or quantitative such as, but not limited to: customer satisfaction, contract acquisition, delivery schedule, cycle-time improvement, productivity, quality, workforce diversity, and environmental management. The CEO recommends the
supplemental goals based on sector goals contained in Annual Operating Plans and corporate office goals established prior to the beginning of each year. Supplemental goals have stated milestones and weights. The CEO’s recommended supplemental
goals are reviewed and amended as appropriate, and established by the Committee at its sole discretion. 
  

	4.	Individual Goals 

 Each year participants develop
individual goals that support achievement of the Company’s business plan and the specific goals established by the Committee in the three aforementioned corporation goals. Individual goals are prepared, approved and documented. The
employee’s manager reviews these goals with each participant to ensure they are aggressive, coordinated and focused on attainment of Company business objectives. 
 SECTION V 
 PERFORMANCE DETERMINATION 
 At the end of the performance year the CEO evaluates the performance of each of the operating units and that of the overall Company against the financial and business goals established at the beginning of the
performance year and submits his assessment to the Committee. 
 The CEO’s final evaluation of performance (the “unit performance factor” or
“UPF”) is stated numerically and is a performance multiplier for individual incentive targets. The UPF will vary from 0.0 to a maximum as approved by the Committee. 
  

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 The Committee, in its sole discretion, after taking into account its appraisal of the overall performance of the Company
in the attainment of such predetermined financial and non-financial objectives, may either increase or decrease the company UPF for these plans. 
 SECTION VI 
 INCENTIVE COMPENSATION APPROPRIATIONS 
  

	1.	The amount appropriated for the plans for a performance year is based on the CEO’s determination of the UPF (as approved or modified by the Committee) and applied to the
individual incentive targets of participants. These performance-adjusted targets are aggregated into the “Appropriated Incentive Compensation” for the performance year. 

  

	2.	In no event shall incentive compensation payable to participants for a performance year exceed the appropriated incentive compensation for the plans as approved by the Committee.


  

	3.	Any appropriated incentive compensation for a performance year, which is not actually distributed to the participants as awards for such year, cannot be transferred to the following
performance year. 

 SECTION VII 
 INCENTIVE COMPENSATION AWARDS 
  

	1.	Individual Award Factors 

  

	 	a.	Target award percentage—is established annually and is a percentage of annual aggregate salary that reflects the varying impact of participant’s positions on business
results. Generally vice presidents will have higher target award percentages than senior middle managers and so forth. 

  

	 	b.	Individual performance—prior to the submission of recommended incentive compensation awards, each participant will be evaluated by his management in relation to the
participant’s achievement of predetermined individual goals and his/her relative contribution during the performance year compared to other participants to the success or profit of the Company. This assessment of performance (the
“individual performance factor” or “IPF”) is stated numerically and is a performance multiplier for individual incentive targets. The IPF may range from 0 to 1.5. 

  

	 	c.	Both the IPF and the UPF are multipliers for the individual participant’s target award percentage to determine that participant’s incentive compensation award.


  

	2.	ICP Awards: 

  

	 	a.	The Committee shall review the CEO’s recommendations and make the final determination of each individual ICP participant’s incentive compensation award for the performance
year. 

  

	3.	AIP Awards: 

  

	 	a.	Prior to the payment of any incentive compensation awards for a performance year, the CEO, or his delegate, may in his sole discretion, adjust or reduce to zero recommended amounts
of incentive compensation awards to all or any of the participants. 

  

	 	b.	The CEO or his delegate shall determine the amount of any adjustment in a participant’s incentive compensation award on the basis of such factors as he deems relevant, and
shall not be required to establish any allocation or weighting component with respect to the factors he considers. 

  

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 SECTION VIII 
 ADMINISTRATION OF THE PLANS 
  

	1.	ICP: The Committee shall be responsible for the administration of the Plan. The Committee shall: 

  

	 	a.	Interpret the ICP, make any rules and regulations relating to that plan, determine which consolidated subsidiaries are significant for the purpose of the first paragraph of SECTION
III, and determine factual questions arising in connection with the ICP, after such investigation or hearing as the Committee may deem appropriate. 

  

	 	b.	As soon as feasible after the close of each performance year and prior to the payment of any incentive compensation for such performance year, review the performance of each
participant and determine the amount of each participant’s individual incentive compensation award, if any, with respect to that performance year. 

  

	 	c.	Have sole discretion in determining incentive compensation awards under the ICP, except that in making awards the Committee may, in its discretion, request and consider the
recommendations of the CEO and others whom it may designate. 

  

	 	d.	Any decisions made by the Committee under the provisions of this SECTION VIII, as well as any interpretations of the ICP by the Committee, shall be conclusive and binding on all
parties concerned. 

  

	2.	AIP: The CEO shall be responsible for the administration of this plan. The CEO shall: 

  

	 	a.	Interpret the AIP, make any rules and regulations relating to the plan, and determine factual questions arising in connection with the AIP. 

  

	 	b.	As soon as feasible after the close of each performance year and prior to the payment of any incentive compensation for such performance year, review the recommended awards of
selected participants, as determined by the CEO, to determine if the award is appropriate with respect to that performance year, making any adjustments as he deems necessary and approving each such award. 

  

	 	c.	Review and approve the total incentive compensation award expenditure of each sector and the Company overall. 

  

	 	d.	Any decisions made by the CEO under the provisions of this Section VIII, as well as any interpretation of the AIP by the CEO, shall be conclusive and binding on all parties
concerned. 

 SECTION IX 
 METHOD OF PAYMENT OF INCENTIVE 
 COMPENSATION TO INDIVIDUALS 
  

	1.	ICP Payments 

  

	 	a.	The amount of incentive compensation award determined for each participant with respect to a given performance year shall be paid in cash or in common stock of the Company
(“Northrop Grumman common stock”) or partly in cash and partly in Northrop Grumman common stock, as the Committee may determine. Except as provided below in this Section IX and subject to any applicable deferred compensation election to
the contrary, payment of the incentive compensation award with respect to a given performance year shall be made by March 15 of the year following such performance year. 

  

	 	b.	Payments in cash may be made in a lump sum with respect to an incentive compensation award for a performance year, or in installments, as the Committee may determine and (in the
case of installments) to the extent consistent with Section 409A of the code. In either event, the Committee may impose such conditions, including forfeitures and restrictions, as the Committee believes will best serve the interests of the
Company and the purposes of the ICP. 

  

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	 	c.	Payments in Northrop Grumman common stock may be made in full with respect to an incentive compensation award for a performance year, or in installments, as the Committee may
determine and (in the case of installments) to the extent consistent with Section 409A of the code. In either event, the Committee may impose such conditions, including forfeitures and restrictions, as the Committee believes will best serve the
interests of the Company and the purposes of the ICP. 

  

	 	d.	In making awards of Northrop Grumman common stock, the Committee shall first determine all incentive compensation awards in terms of dollars. The total dollar amount of all
incentive compensation awards for a particular year shall not exceed the appropriated incentive compensation for that performance year under the ICP. After fixing the total amount of each Participant’s incentive compensation award in terms of
dollars, then if some or all of the award is to be paid in Northrop Grumman common stock, the dollar amount of the incentive compensation award so to be paid shall be converted into shares of Northrop Grumman common stock by using the fair market
value of such stock on the date of the award. “Fair market value” shall be the closing price of such stock on the New York Stock Exchange on the date of the award, or, if no sales of such stock occurred on that date, then on the last
preceding date on which such sales occurred. No fractional share shall be issued. 

  

	 	e.	If an incentive compensation award is paid in Northrop Grumman common stock, the number of shares shall be appropriately adjusted for any stock splits, stock dividends,
re-capitalization or other relevant changes in capitalization effective after the date of award and prior to the date as of which the participant becomes the record owner of the shares received in payment of the award. All such adjustments
thereafter shall accrue to the participant as the record owner of the shares. 

  

	 	f.	Northrop Grumman common stock issued in payment of incentive compensation awards may, at the option of the Board of Directors, be either originally issued shares or treasury shares.


  

	 	g.	Distribution of awards shall be governed by the terms and conditions applicable to such awards, as determined by the Committee or its delegate. An award, the payment of which is to
be deferred pursuant to the terms of an employment agreement, shall be paid as provided by the terms of such agreement. Awards or portions thereof deferred pursuant to any other deferred compensation plan or deferral arrangement shall be paid as
provided in such plan or arrangement. Any other awards the payment of which has been deferred, in whole or in part, shall be paid as determined by the Committee. 

  

	 	h.	The Company shall have the right to deduct from all payments under the ICP any federal, state, or local taxes required by law to be withheld with respect to such payments.


  

	 	i.	No participant or any other party claiming an interest in amounts earned under the ICP shall have any interests whatsoever in any specific asset of the Company. To the extent that
any party acquires a right to receive payments under the ICP, such right shall be equivalent to that of an unsecured general creditor of the Company. Awards payable under the plan shall be payable in shares or from the general assets of Northrop
Grumman, and no special or separate reserve, fund or deposit shall be made to assure payment of such awards. 

  

	2.	AIP Payments 

  

	 	a.	The amount of incentive compensation award determined for each participant with respect to a given performance year shall be paid in cash no later than March 15 of the year
following that performance year. 

  

	 	b.	The Company shall have the right to deduct from all payments under this plan any federal, state, or local taxes required by law to be withheld with respect to such payments.


  

	 	c.	No participant or any other party claiming an interest in amounts earned under the AIP shall have any interest whatsoever in any specific asset of the Company. To the extent that
any party acquires a right to receive payments under the plan, such right shall be equivalent to that of an unsecured general creditor of the Company. Awards payable under the AIP shall be payable in shares or from the general assets of Northrop
Grumman, and no special or separate reserve, fund or deposit shall be made to assure payment of such awards. 

  

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 SECTION X 
 AMENDMENT OR TERMINATION OF PLANS 
 The Committee shall have the right to terminate or amend these plans at any time and to
discontinue further appropriations to the plans. 
 Without limiting the generality of the preceding paragraph, the Committee reserves the right to adjust
performance measures, the applicable performance goals and performance results with respect to either or both of the plans to the extent the Committee determines such adjustment is reasonably necessary or advisable to preserve the intended
incentives and benefits under the plans to reflect (1) any change in capitalization, any corporate transaction (such as a reorganization, combination, separation, merger, acquisition, or any combination of the foregoing), or any complete or
partial liquidation, (2) any change in accounting policies or practices, or (3) the effects of any special charges to earnings, or (4) any other similar special circumstances. 
 SECTION XI 
 EFFECTIVE DATE 
 These plans shall be effective for performance years commencing with and following 2006 and shall stay in effect until amended, modified or terminated by the Committee.
The provisions of these plans, together with those of the 2002 Incentive Compensation Plan for Section 162(m) Officers, shall supersede and replace those of prior plan documents. 
 SECTION XII 
 MISCELLANEOUS 
  

	1.	Participation in any plan shall not constitute an agreement of the participant to remain in the employ of and to render his/her services to the Company, or of the Company to
continue to employ such participant, and the Company may terminate the employment of a participant at any time with or without cause. 

  

	2.	In the event any provision of the plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the plans, and the plans
shall be construed and enforced as if the illegal or invalid provision had not been included. 

  

	3.	All costs of implementing and administering the plans shall be borne by the Company. 

  

	4.	All obligations of the Company under the plans shall be binding upon and inure to the benefit of any successor to the Company, whether the existence of such successor is the result
of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. 

  

	5.	The plans and any agreements hereunder, shall be governed by and construed in accordance with the laws of the state of Delaware. 

  

	6.	The rights of a participant or any other person to any payment or other benefits under either of the plans may not be assigned, transferred, pledged, or encumbered except by will or
the laws of decent or distribution. 

 Neither of the plans constitutes a contract. Neither of the plans confers upon any person any right to
receive a bonus or any other payment or benefit. There is no commitment or obligation on the part of Northrop Grumman (or any affiliate) to continue any bonus plan (similar to the plans or otherwise) in any particular year. 
  

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