December 17, 2007

 

Dear Shareowner:

 

You are cordially invited to attend the 2008 Annual Meeting of Shareowners of the Corporation.

 

The meeting will be held at The Cedar Rapids Marriott, 1200 Collins Road NE, Cedar Rapids, Iowa, on Tuesday, February 12, 2008, at 10:00 a.m. (Central Standard Time). At the meeting we will present a current report of the activities of the Corporation followed by discussion and action on the matters described in the Proxy Statement. Shareowners will have an opportunity to comment on or inquire about the affairs of the Corporation that may be of interest to shareowners generally.

 

If you plan to attend the meeting, please indicate your desire in one of the ways described in the box on the last page of the Proxy Statement.

 

We sincerely hope that as many shareowners as can conveniently attend will do so.

 

Sincerely yours,

 

Clayton M. Jones

Chairman, President and Chief Executive Officer

ROCKWELL COLLINS, INC.

400 Collins Road NE, Cedar Rapids, Iowa 52498

 

Notice of 2008 Annual Meeting of Shareowners

 

To the Shareowners of

ROCKWELL COLLINS, INC.:

 

Notice Is Hereby Given that the 2008 Annual Meeting of Shareowners of Rockwell Collins, Inc. will be held at The Cedar Rapids Marriott, 1200 Collins Road NE, Cedar Rapids, Iowa, on Tuesday, February 12, 2008, at 10:00 a.m. (Central Standard Time) for the following purposes:

 

 

Only shareowners of record at the close of business on December 14, 2007 will be entitled to notice of, and to vote at, the meeting.

 

By order of the Board of Directors.

 

Gary R. Chadick

Secretary

 

December 17, 2007

 

Note: The Board of Directors solicits votes by the execution and prompt return of the

accompanying proxy in the enclosed return envelope or by use of our

telephone or Internet voting procedures.

ROCKWELL COLLINS, INC. PROXY STATEMENT

 

Table of Contents

 

 

PROXY STATEMENT

 

The 2008 Annual Meeting of Shareowners of Rockwell Collins, Inc. will be held on February 12, 2008, for the purposes set forth in the accompanying Notice of 2008 Annual Meeting of Shareowners.

 

This statement and the accompanying proxy, that are first being sent to shareowners on or about December 26, 2007, are furnished in connection with the solicitation by the Board of Directors of proxies to be used at the meeting and at any adjournment thereof. If a shareowner duly executes and returns a proxy in the accompanying form or uses our telephone or Internet voting procedures to authorize the named proxies to vote the shareowner’s shares, those shares will be voted as specified, and if no specification is made, the shares will be voted in accordance with the recommendations of the Board of Directors. The proxy and any votes cast using our telephone or Internet voting procedures may be revoked prior to exercise at the meeting by delivering written notice of revocation to the Secretary of the Corporation, by executing a later dated proxy, by casting a later vote using the telephone or Internet voting procedures or by attending the meeting and voting in person.

 

VOTING SECURITIES

 

Only shareowners of record at the close of business on December 14, 2007, the record date for the meeting, are entitled to notice of, and to vote at, the meeting. On December 14, 2007, we had outstanding 163,140,766 shares of our Common Stock, par value $0.01 per share (Common Stock). Each holder of Common Stock is entitled to one vote for each share held. We have no class or series of shares currently outstanding other than our Common Stock.

 

ELECTION OF DIRECTORS

 

Our Board of Directors currently consists of ten members. This number is expected to be reduced to eight at the 2008 Annual Meeting of Shareowners because Mr. Carns and Mr. Toot will retire from our Board when their terms expire at the Annual Meeting consistent with the Board’s retirement age policy in our Corporate Governance Guidelines. That retirement age policy requires each nominee for director to be under age 70 as of the meeting of shareowners for which he or she will stand for election. Mr. Carns currently serves as Chairman of our Board Nominating and Governance Committee and is a member of our Technology Committee. Mr. Toot currently serves as Chairman of our Audit Committee and is a member of our Compensation Committee.

 

Our Restated Certificate of Incorporation provides that the Board of Directors shall consist of three classes of directors with overlapping three-year terms. One class of directors is to be elected each year with terms extending to the third succeeding Annual Meeting after election. The Restated Certificate of Incorporation provides that the Board of Directors shall maintain the three classes so as to be as nearly equal in number as the then total number of directors permits. The two directors in Class I who are elected at the 2008 Annual Meeting will serve for a term expiring at our Annual Meeting in the year 2011. The three directors in Class II and the three directors in Class III are serving terms expiring at our Annual Meetings in 2009 and 2010, respectively.

 

It is intended that proxies in the accompanying form properly executed and returned to our proxy tabulator or shares properly authorized to be voted in accordance with our telephone or Internet voting procedures will be voted at the meeting, unless authority to do so is withheld, for the election as directors of the two nominees specified in Class I — Nominees for Directors with Terms Expiring in 2011 (Chris A. Davis and Ralph E. Eberhart), each of whom now serves as a director with a term extending to the 2008 Annual Meeting and until a successor is elected and qualified. If for any reason any of the nominees is not a candidate (which is not expected) when the election occurs, it is expected that proxies in the accompanying form or shares properly authorized to be voted in accordance with our telephone or Internet voting procedures will be voted at the meeting for the election of a substitute nominee or, in lieu thereof, the Board of Directors may reduce the number of directors.

 

INFORMATION AS TO NOMINEES FOR DIRECTORS AND CONTINUING DIRECTORS

 

There is shown below for each nominee for director and each continuing director, as reported to us as of December 1, 2007, the nominee’s or continuing director’s name, age and principal occupation; the position, if any, with us; the period of service as a director of our company; other public company directorships held; and the committees of the Board of Directors on which the nominee or continuing director serves.

 

 

The Board of Directors recommends that you vote “FOR” the election as directors of the two Class I nominees named above, that is presented as item (1) on the accompanying proxy card.

 

CORPORATE GOVERNANCE;
BOARD OF DIRECTORS AND COMMITTEES

 

Our business is managed through the oversight and direction of the Board of Directors. Our Board seeks to maintain high corporate governance standards.

 

The directors regularly keep informed about our business at meetings of the Board and its Committees and through various supplemental reports and communications between meetings. Our non-employee directors meet regularly in executive sessions without the presence of any corporate officers. These executive sessions are chaired by the Chair of the Executive Committee or a director, designated by the independent directors, who has the relevant background to lead the discussion of a particular matter.

 

We continue to enhance our corporate governance structure from time to time in light of regulatory activity and based upon a review of recommended best practices. Our corporate governance documents are available free of charge on our website at www.rockwellcollins.com. We will provide, without charge, upon written request, copies of our corporate governance information. These documents include our Restated Certificate of Incorporation, By-Laws, Board of Directors Guidelines on Corporate Governance, Committee Charters, Board Membership Criteria, Code of Ethics, Categorical Standards and Policy for Director Independence, and Related Person Transaction Policy.

 

Board Independence

 

The Board of Directors has determined that no director other than Messrs. Jones and Beall has a material relationship with the Corporation. Accordingly, eight of our ten directors are “independent” directors based on an affirmative determination by our Board of Directors in accordance with the listing standards of the New York Stock Exchange (“NYSE”) and Securities and Exchange Commission (“SEC”) rules.

 

The standards relied upon by the Board in affirmatively determining whether a director is independent are comprised, in part, of those objective standards set forth in the NYSE and SEC rules. The Corporation’s Categorical Standards and Policy for Director Independence have been adopted by the Board to assist it in making determinations regarding the independence of its members.

 

The Board evaluated for Mr. Donegan the annual amount of purchases by us in the ordinary course of business from a subsidiary of the company where he serves as an executive officer and determined that the amount of such purchases was below the greater of $1,000,000 or 2% of the other company’s consolidated gross annual revenues pursuant to the Commercial Relationship categorical standard set forth in the Categorical Standards and Policy for Director Independence.

 

A copy of the Categorical Standards and Policy for Director Independence is available on Rockwell Collins, Inc.’s website at www.rockwellcollins.com.

 

Board Meetings and Attendance

 

In fiscal year 2007, the Board of Directors held eight meetings and acted on three occasions by unanimous written consent in lieu of a meeting. All of the directors attended at least 75% of the meetings of the Board and the Committees on which they served, and most of the directors attended 100% of such meetings. Directors are expected to attend the Annual Meeting of Shareowners unless they have a valid reason such as a schedule conflict. Last year, all ten directors attended our 2007 Annual Meeting of Shareowners.

 

Board Committees

 

The Board has established five committees whose principal functions are briefly described below.

 

The Audit Committee has three independent directors. It assists the Board in overseeing (i) our accounting and financial reporting processes; (ii) the integrity and audits of our financial statements; (iii) our

compliance with legal and regulatory requirements; (iv) the qualifications and independence of our independent auditors; and (v) the performance of our internal and independent auditors. The Audit Committee also:

 

 

The specific functions and responsibilities of the Audit Committee are set forth in the Audit Committee Charter, which is available on our website at www.rockwellcollins.com. The Committee met six times during fiscal year 2007.

 

The Board Nominating and Governance Committee, which is comprised of three independent directors, has as part of its principal functions seeking, considering and recommending to the Board qualified candidates for election as directors and recommending a slate of nominees for election as directors at the Annual Meeting. It also periodically prepares and submits to the Board for adoption the Committee’s selection criteria for director nominees (“Board Membership Criteria”). It reviews and makes recommendations on matters involving general operation of the Board and our corporate governance, and it annually recommends to the Board nominees for each committee of the Board. In addition, the Committee annually facilitates the assessment of the Board of Directors’ performance as a whole and of the individual directors and reports thereon to the Board. The Committee has the sole authority to retain and terminate any search firm to be used to identify director candidates. For more information regarding the Committee’s role in director nominations, see “Director Nominations” below. The Committee members met four times during fiscal year 2007.

 

The Compensation Committee has three independent directors. The principal functions of the Compensation Committee are to evaluate the performance of our senior executives; review and approve senior executive compensation plans, policies and programs; consider the design and competitiveness of our compensation plans; administer and review changes to our incentive, deferred compensation, stock option and long-term incentives plans pursuant to the terms of the respective plans; and review and discuss the Compensation Discussion and Analysis for inclusion in our proxy statement. The Committee also reviews and approves corporate goals and objectives relevant to CEO compensation, evaluates the CEO’s performance in light of those goals and objectives, and after receiving input from the Board, determines the CEO’s compensation. The Committee has the sole authority to retain and terminate any compensation consultant to be used to assist in the evaluation of CEO or senior executive compensation. The Committee met four times during fiscal year 2007.

 

The Executive Committee is comprised of Mr. Jones and two non-employee directors. The principal function of the Executive Committee is to discharge certain responsibilities of the Board of Directors between meetings of the Board of Directors. The Committee may exercise all of the powers of the Board of Directors, except it has no power or authority to adopt, amend or repeal any sections or articles of our By-Laws or Restated Certificate of Incorporation; elect or remove officers, or fill vacancies in the Board of Directors or in committees; fix compensation for officers, directors or committee members; amend or rescind prior resolutions of the Board; make recommendations to shareowners or approve transactions that require shareowner approval; issue additional stock of the Corporation or fix or determine the designations and any of the rights and preferences of any series of stock or take certain other actions specifically reserved for the Board. The Committee met once during fiscal year 2007.

 

The Technology Committee has three non-employee directors. The principal functions of the Technology Committee are to review and provide guidance on important technology-related issues, including the assessment of (i) our technology competitiveness; (ii) the strength and competitiveness of our engineering processes and disciplines; (iii) our technology planning processes to support our growth objectives; and (iv) our focus on

engineering leadership and critical technologist development and replacement planning. The Committee met two times during fiscal year 2007.

 

Director Nominations

 

The Board Nominating and Governance Committee is responsible for identifying individuals who meet the Board’s membership criteria, and recommending to the Board the election of such individuals. The Committee identifies qualified candidates in many ways including utilizing outside search firms and by receiving suggestions from directors, management and shareowners. An outside search firm recommended current nominee Ralph E. Eberhart for consideration by the Board Nominating and Governance Committee. Shareowners wishing to recommend director candidates for consideration by the Committee can do so by writing to the Board Nominating and Governance Committee, c/o the Secretary of the Corporation at our corporate headquarters in Cedar Rapids, Iowa, giving the candidate’s name, biographical data and qualifications. Any such recommendation must be accompanied by a written statement from the individual of his or her consent to be named as a candidate and, if nominated and elected, to serve as a director. In addition to recommending nominees to the Committee, shareowners may also propose nominees for consideration at shareowner meetings. These nominee proposals must be provided timely and otherwise meet the requirements set forth in our By-Laws. See “Shareowner Proposals for Annual Meeting in 2009” set forth later in this proxy statement.

 

The Committee evaluates the qualifications of candidates properly submitted by shareowners under the same criteria and in the same manner as potential nominees identified by the Corporation. Director candidates are reviewed by the Committee as part of the Committee’s Charter against various general guidelines set forth in the Board Membership Criteria, a copy which can be found at www.rockwellcollins.com under the Investor Relations tab. In addition to the general guidelines, the Committee has identified the following minimum qualifications for Board membership: each nominee for director should be an individual of the highest character and integrity, have solid leadership skills, have experience at strategy/policy setting, have good communication skills, have a reputation for working constructively with others, have sufficient time available to devote to the affairs of the Corporation, be free of any conflict of interest that would interfere with the proper performance of the responsibilities of a director, and be under the age of 70 as of the meeting of shareowners for which he or she will stand for election.

 

Communicating With Board Members

 

As discussed above, the Chair of the Executive Committee generally presides at regular executive sessions of our non-employee directors. Any shareowner or other interested party may communicate directly with this presiding director by sending an email to presidingdirector@rockwellcollins.com or writing to: Presiding Director, Rockwell Collins, Inc., 400 Collins Road NE, Cedar Rapids, IA 52498. Communications by shareowners or other interested parties may also be sent to non-employee directors, as a group or individually, by sending an email to boardofdirectors@rockwellcollins.com or by writing to Board of Directors (or one or more directors by name), Attn: Corporate Secretary, Rockwell Collins, Inc., 400 Collins Road NE, Cedar Rapids, IA 52498. Upon receipt of any communication, the Corporate Secretary will determine the nature of the communication and, as appropriate, facilitate direct communication with the appropriate director.

 

CERTAIN TRANSACTIONS AND OTHER RELATIONSHIPS

 

The Board has adopted the Related Person Transaction Policy providing for the review and approval or ratification by the Audit Committee of certain transactions or relationships involving Rockwell Collins and its directors, executive officers, certain shareowners and their affiliates. The Audit Committee is responsible for reviewing these transactions and takes into account the pertinent facts and circumstances presented, and any other information they deem appropriate, to determine the disposition action that is in the best interests of the Corporation. A copy of the Related Person Transaction Policy is available on our website at www.rockwellcollins.com.

 

This written policy sets forth procedures for the review, approval or ratification and monitoring of transactions involving Rockwell Collins and “related persons.” For the purposes of the policy, “related persons”

include executive officers, directors and director nominees or their immediate family members, or shareowners owning five percent or greater of Rockwell Collins’ outstanding stock. The Related Person Transaction Policy defines “related person transactions” in accordance with applicable SEC rules as any transaction in which the Corporation was or is to be a participant, a related person has a material direct or indirect interest and that exceeds $120,000. The policy requires these related person transactions to be reviewed and approved or ratified by the Audit Committee. In addition, this policy requires related persons to disclose to the Audit Committee the material terms of the related person transaction, including the approximate dollar value of the amount involved in the transaction and the related person’s direct or indirect material interest in, or relationship to, the related person transaction.

 

The Corporation employs in non-executive positions the spouses of two executives and those spouses receive in excess of $120,000 in total employee compensation each. The compensation of these family members was established in accordance with the Corporation’s employment and compensation practices applicable to employees with equivalent qualifications, experience and responsibilities. These two employment relationships were approved by the Board.

 

The Corporation purchases goods and services in the ordinary course of business from a subsidiary of a company where Mr. Donegan, a director of ours, serves as an executive officer. This relationship is further discussed above under Corporate Governance; Board of Directors and Committees — Board Independence. This relationship has been approved by the Board.

 

In addition, Mr. Beall’s Rockwell benefits assumed by us, as described below under the heading “Compensation of Directors” have been ratified and approved pursuant to the Related Person Transaction Policy.

 

AUDIT COMMITTEE REPORT

 

The Audit Committee of the Board of Directors consists entirely of directors who meet the independence and other requirements of the New York Stock Exchange and applicable law. Two of its three members have been deemed “audit committee financial experts” (as defined by applicable Securities and Exchange Commission rules) by our Board. The Committee has furnished the following report:

 

We assist the Board of Directors in overseeing and monitoring the integrity of the Corporation’s financial reporting process, compliance with legal and regulatory requirements and the quality of the internal and external audit processes. Our roles and responsibilities are set forth in a written Charter adopted by the Board of Directors. We review and reassess the Charter periodically and recommend any changes to the Board for approval.

 

We are responsible for overseeing the Corporation’s overall financial reporting process. In fulfilling our responsibilities for the financial statements for fiscal year 2007, we:

 

 

Based on our review of the audited financial statements and discussions with management and Deloitte, we recommended to the Board of Directors that the audited financial statements be included in the Corporation’s Annual Report on Form 10-K for fiscal year 2007 for filing with the SEC. The Audit Committee also has reviewed the performance and independence of Deloitte and recommends that shareowners approve the selection of Deloitte as the Corporation’s independent auditors for fiscal year 2008.

 

Audit Committee

Joseph F. Toot, Jr., Chairman

Chris A. Davis

Andrew J. Policano

 

EQUITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Principal Shareowners

 

There is no shareowner known to us that beneficially owns more than 5% of the outstanding shares of our Common Stock as of September 30, 2007.

 

Management Equity Ownership

 

The following table shows the beneficial ownership, reported to us as of December 1, 2007, of our Common Stock, including shares as to which a right to acquire ownership within 60 days exists (for example, through the exercise of stock options or through various trust arrangements) within the meaning of Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, as amended, of each director, each executive officer listed in the table and of such persons and other executive officers as a group.

 

 

 

 

 

COMPENSATION OF DIRECTORS

 

2007 DIRECTOR COMPENSATION TABLE

 

The following table sets forth information regarding compensation for each of our non-employee directors for 2007. Our non-employee director compensation program is comprised of cash (board and committee annual retainer fees) and equity (restricted stock unit awards). Mr. Jones, who is a director and an employee, does not participate in this compensation program for non-employee directors.

 

 

 

 

 

 

 

Cash Compensation

 

All non-employee directors receive a retainer fee of $85,000 per year for service on the Board of Directors, payable in advance in equal quarterly installments. An additional $10,000 annual retainer fee is paid to the Audit Committee chair. An additional $5,000 annual retainer fee is paid to each of the other Audit Committee members. No additional retainer is paid for service on committees other than the Audit Committee. Under the 2006 Long-Term Incentives Plan (2006 LTIP), each director has the option each year to determine whether to defer all or any part of his or her retainer fees by electing to receive restricted stock units of our Common Stock valued at the closing price of our Common Stock on the New York Stock Exchange Composite Transactions reporting system on the date the cash retainer payment would otherwise be paid. Directors are reimbursed for all reasonable expenses associated with attending board and committee meetings and otherwise relating to their director duties. Directors are eligible to obtain up to $5,000 in matching charitable gifts under our Matching Gift Program.

 

Stock-Based Compensation

 

In addition to the retainer fees described above, each non-employee director is granted 3,000 restricted stock units of our Common Stock under the 2006 LTIP effective concurrently with the director’s election to our Board. Following the completion of one year of service on the Board, each non-employee director was granted 1,500 restricted stock units of our Common Stock immediately after every Annual Meeting of Shareowners of the Corporation. Pursuant to the terms of the directors’ restricted stock units, dividend equivalents in the form of additional restricted stock units accumulate on the date we otherwise pay dividends on our Common Stock and directors receive unrestricted shares of our Common Stock in payment for restricted stock units upon termination of service on the Board of Directors. A director has no voting rights on the restricted stock units prior to the issuance of unrestricted shares upon termination of service.

Director Compensation for 2008

 

In November 2007, the Board of Directors amended the compensation plans for non-employee directors in 2008. Non-employee directors will be provided a retainer fee of $100,000 per year for service on the Board of Directors, payable in advance in equal quarterly installments. Following the completion of one year of service on the Board, each non-employee director will receive an equity grant based on a $100,000 value of restricted stock units of our Common Stock immediately after every Annual Meeting of Shareowners of the Corporation. Each non-employee director’s initial equity grant will be based on a $200,000 value for the restricted stock units of our Common Stock effective concurrently with the director’s election to our Board. Directors will continue to be reimbursed expenses, be eligible for matching gifts and have the option to defer retainer fees by electing to receive restricted stock units of our Common Stock.

 

Other

 

Mr. Beall receives, in addition to the standard non-employee director compensation described above, directly or indirectly approximately $20,000 per month for office, telecommunication and administrative services. Payment for these office, telecommunication and administrative services are benefits granted by Rockwell International Corporation (now known as Rockwell Automation, Inc.) (“Rockwell”) that were assumed by us in our spin-off from Rockwell (the “Distribution”) and are not compensation for services provided to us as a director. Mr. Beall also receives various retirement benefits (principally defined benefit pension, 401(k) savings plan distributions and deferred compensation payouts) associated with his years of service with Rockwell that were assumed by us in the Distribution.

 

Director Stock Ownership Guidelines

 

Each non-employee director is required to own shares of our Common Stock with a market value of at least three times the annual retainer amount within four years of joining the Board of Directors.

 

EXECUTIVE COMPENSATION

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Introduction

 

This Compensation Discussion and Analysis (CD&A) provides detailed information about the compensation program for the Corporation’s named executive officers. It includes the Compensation Committee’s philosophy and objectives, roles and responsibilities, descriptions of each of the elements of compensation and the basis for compensation adjustments, incentive payments and long-term incentive grants made for 2007. Unless otherwise noted, references to years in this CD&A are to Rockwell Collins’ fiscal year which commences in October.

 

Compensation Philosophy and Objectives

 

The Compensation Committee (“Committee”) has developed and implemented compensation policies, plans and programs to provide competitive compensation opportunities with actual payments highly dependent on the Corporation’s performance results and enhancements to shareowner value, consistent with a pay-for-performance philosophy. Base salaries and target incentive compensation are set around the median compensation levels of other major U.S. Industrial and Aerospace peer companies, adjusted for size. The Committee considers the total compensation package (earned or potentially available, including benefits) in establishing each element of compensation.

 

The policies, plans and programs are designed to meet the following objectives:

 

 

 

What Compensation is Intended to Reward

 

A significant amount of the named executive officers’ compensation is variable, tied to performance as measured by specific goals for both the annual and long-term incentive plans. To support the pay-for-performance philosophy, performance is evaluated as follows:

 

Corporate Performance.  The annual incentive plan is designed to reward the achievement of annual financial goals and key business goals that are important to the current and future success of the Corporation. These goals are included in the Corporation’s annual operating plan that is prepared by management and approved by the Board of Directors. The same annual incentive plan design and performance metrics apply to all named executive officers and most employees of the Corporation worldwide.

 

The long-term incentives plan has been established to reward the achievement of long-term financial goals and increased shareowner value. This plan applies generally to about 130 employees of the Corporation including the named executive officers. These long-term incentives include three-year performance awards and stock options.

 

Business Unit Performance.  The Chief Executive Officer (“CEO”) reviews the performance of each business unit and shared service based on the achievement of goals included in the Corporation’s annual operating plan consisting of both financial and non-financial measures. Based on this overall assessment, the CEO has the discretion to adjust the annual incentive pool upward or downward to reflect the business unit’s or shared service’s performance. The Committee has delegated within limits to the CEO certain discretion to increase or decrease the annual incentive pool to allow for these adjustments.

 

Individual Performance.  The Corporation has a formal performance management program called Performance Review and Development Plan that applies to all salaried employees including the named executive officers. Individual performance goals are established at the beginning of each year and are aligned with the annual operating plan. Performance against these goals is evaluated at the mid-year point and at the end of the year. The CEO’s personal goals are approved by the Compensation Committee each year in September for the next year. Following the end of the year at their November meeting, the Committee, with input from the other directors, formally evaluates the CEO’s performance during its executive session. The CEO approves the individual performance goals of the other named executive officers at the beginning of each year, evaluates their performance at the end of the year and recommends to the Committee any resulting performance adjustments to their salaries and annual incentive payments.

 

Roles and Responsibilities

 

Compensation Committee.  The Board of Directors has delegated to the Committee responsibility for the development and oversight of the Corporation’s executive compensation programs. The Committee consists entirely of independent directors. The Committee reports back to the Board of Directors the results of its review and specific proposals regarding changes to compensation programs and actions regarding the CEO. In accordance with its charter (available at www.rockwellcollins.com) and its operating procedures and guidelines, the Committee is responsible for the following:

 

 

 

The Committee has established a recurring agenda that ensures a consistent and timely review of those areas under its responsibility.

 

Independent consultant.  The Committee selects and retains the services of an independent consultant to provide professional advice related to the Corporation’s executive compensation plans. The independent consultant, Semler Brossy Consulting Group, LLC (“independent consultant”), is retained by the Committee and provides no other service to the Corporation. The independent consultant has direct interaction with the Committee’s chairman, attends Committee meetings and provides independent benchmarking of peer companies and general industry compensation and practices. The independent consultant meets with new Committee members to orient them to the various policies, programs and processes managed by the Committee. The independent consultant meets with management to collect information, to solicit management’s input and to fully understand the Corporation’s plans, goals and actual performance. The consulting relationship is reviewed by the Committee annually to determine its satisfaction with the services and advice provided by the independent consultant.

 

Management.  The CEO reports to the Committee about the Corporation’s performance, business unit performance and individual performance of the other named executive officers. He also discusses the operational and financial plans for future performance periods (annual and long-term) as they relate to compensation decisions. The CEO provides input on the design of compensation programs and policies. He also makes recommendations for compensation changes for the other named executive officers. The Senior Vice President, Human Resources provides additional support, analysis and counsel, including execution of the programs under the supervision of the Committee. Certain members of management, including the CEO, regularly attend Committee meetings. The CEO is delegated authority for the compensation arrangements for executives below the designated senior executive positions in the Corporation, with limitations that are established by the Committee. The Committee typically meets for a portion of its meetings in executive session, with its independent consultant but without the CEO or other members of management. The Committee’s deliberations on CEO compensation are held during a non-management executive session that typically includes all board members.

 

Market Benchmarking

 

Prior to the beginning of each year, the Committee considers benchmark market data for total direct compensation (base salary plus annual and long-term incentives) for the CEO, named executive officers and other designated senior executives based on the research done by the independent consultant. The Committee utilizes this market data to assess the competitiveness of the Corporation’s executive compensation and the mix of fixed (base salary) and variable (annual and long-term incentives) compensation.

 

The Committee utilizes two sources of information to benchmark executive compensation — a general industry peer group with revenues similar to the Corporation and a peer group of companies in the aerospace industry.

 

 

 

 

These companies were selected because they are representative of companies that compete with us for business and executive talent. The peer group is reviewed periodically to assure that it continues to meet the needs of the Committee.

 

Each year the independent consultant collects compensation data from public filings for each of these companies. Rockwell Collins’ revenue is around the median of the peer group; however, because some companies are larger and some are smaller, the data is size-adjusted to obtain a more accurate view of the market. This data is also interpreted giving consideration to year-over-year variability and the impact of changes of any individual named executive officer among the peer group companies.

 

The Committee generally sets target total direct compensation (base salary and annual and long-term incentives) around the median of the benchmark data. Each executive can be paid above or below that amount based on years in the position, prior experience, individual performance and corporate performance.

 

Comprehensive Compensation Review

 

In the course of reviewing benchmark information from external sources and making decisions about the CEO’s compensation or considering the CEO’s recommendations for the other named executive officers, the Committee also reviews comprehensive compensation portfolios for each named executive officer. This portfolio information includes detailed modeling of the current dollar value of all aspects of compensation, including base salary, annual and long-term incentives, perquisites, pension and savings plans, and health and welfare benefits. The Committee reviews this information to ensure that the total compensation awarded to each named executive officer is reasonable and consistent with the compensation philosophy and objectives discussed above.

 

Elements of the Compensation Program

 

The elements of the Corporation’s executive compensation program are as follows: base salary, annual incentive, long-term incentives, perquisites and benefits. Each year the Committee approves the design and performance goals for both the annual and long-term incentives consistent with the Committee’s compensation philosophy and objectives.

 

Allocation among the elements of direct compensation.  The mix of base salary, annual and long-term incentives varies by position. To support the pay-for-performance philosophy and consistent with external benchmark information, the higher the level of responsibilities and accountability, the more compensation is “at risk” for achieving the Corporation’s annual and long-term performance goals. For the CEO, other named

executive officers and other executive officers, the mix of the elements of total direct compensation at target levels is generally the following:

 

 

Base Salary.  Each of the named executive officers, including the CEO, is paid a base salary for performance of his/her job duties and responsibilities. Base salary targets are generally set around the median of the competitive data; however, actual salaries can be below, at or above the median depending on performance and past experience. Newly promoted named executive officers are typically paid below the median of the competitive data with salary increases over time designed to move them to the median subject to meeting or exceeding their performance objectives.

 

Base salary is reviewed annually and consideration is given for base salary adjustments based on individual performance and available competitive data that is presented by the independent consultant. Salaries are reviewed after the end of the fiscal year and any adjustments go into effect on January 1 each year, consistent with practices for all salaried employees. The salaries of the CEO and the other named executive officers are decided by the Committee after considering input from the CEO regarding salaries of the other named executive officers and consulting with the independent consultant and the Board of Directors.

 

Annual Incentives.  The Incentive Compensation Plan is an annual incentive plan with payouts based on the achievement of specific financial goals and key business goals that are included in the Corporation’s annual operating plan as approved by the Board of Directors. The annual operating plan reflects the Corporation’s performance commitments to its key constituents — shareowners, customers and employees — for the upcoming year. The Incentive Compensation Plan includes specific goals for sales, earnings per share and working capital as a percentage of sales, and non-financial goals (“key business goals”) in the categories of growth/program pursuits, operational excellence and people goals. The philosophy is to provide competitive annual incentive payouts when financial and non-financial goals are met, to provide above-target payouts when these goals are exceeded, and to provide below target or no payouts when these goals are not met.

 

The Committee establishes the annual performance target goals and sets each named executive officer’s annual target bonus as a percentage of salary based upon the median of the competitive benchmark data for each position. Annual incentive payments can range from 0% to 200% of the annual incentive target based on the performance achieved against the financial and key business goals. Each named executive officer’s payout may also be adjusted based upon the individual’s and his or her business unit’s performance during that fiscal year.

 

The annual incentive pool is the sum of all target bonuses for the named executive officers and other executives who participate in the annual incentive plan multiplied by the annual incentive payout percent based on the performance of the Corporation against the goals that were established for the year. The incentive pool is subject to business unit, as well as individual, adjustments in accordance with recommendations from the CEO to the Committee. Individual performance adjustments can be made to the resulting incentive payments; however, they cannot in the aggregate increase the size of the incentive pool unless the CEO exercises the discretion delegated to him by the Committee to increase the pool by up to 5%.

 

The 2006 Annual Incentive Compensation Plan for Senior Executive Officers, approved by shareowners at the 2006 Annual Meeting, provides for performance-based annual incentive compensation that is in compliance with Internal Revenue Code Section 162(m) allowing for the full tax deduction for the annual incentive payment. This plan defines a maximum amount for the awards that can be allocated each year to the CEO and to the other named executive officers. The annual incentive awards actually paid based on the annual Incentive Compensation Plan described above have been well below the maximum allowed by the Senior Executive Incentive Compensation Plan.

Annual Incentive Plan Performance Results.  A disciplined performance philosophy has been applied to the annual incentive plan. When results did not fully meet pre-established goals in 2002 and 2003 due to various factors including the effects of September 11th on the Commercial Systems business, annual incentives were paid at 84% and 75% of target amounts, respectively. For 2004 through 2006, the Corporation’s performance has been outstanding and has exceeded pre-established targets each year and, as a result, annual incentives were paid well above target levels (191%, 200% and 143%, respectively). These payouts were the result of exceeding demanding performance objectives, as the earnings per share (total earnings after taxes divided by total diluted shares outstanding) goals clearly illustrate. The goal for a target payout each year for 2004-2006 represented a substantial increase over the prior year actual earnings per share — about 13% per year increase on average during 2004-2006. However, actual growth well exceeded even these targets, with earnings per share gains adjusted for acquisitions and non-recurring items of 23%, 32% and 23% each year for 2004-2006. Sales growth goals and working capital goals generally had similar patterns with performance exceeding demanding goals.

 

Long-Term Incentives.  The 2006 Long-Term Incentives Plan, approved by the Corporation’s shareowners, provides the Committee with the flexibility to grant long-term incentive awards in a variety of forms including equity and multi-year performance awards. The purpose of long-term incentive compensation is to align an executive’s performance to the long-term success of the Corporation and to the creation of shareowner value. As a result, a significant portion of the compensation of the CEO and other named executive officers is at risk for achieving the strategic financial performance targets set by the Committee in these long-term incentive awards and for growing the Corporation’s stock price. These awards also serve as an important retention tool because they vest over multiple years.

 

Each year the Committee reviews the competitive market data and analysis for long-term incentive grants provided by the independent consultant. This review includes the amount of compensation awarded and the design of a long-term incentive plan that will support the Committee’s pay-for-performance philosophy. The target long-term incentive compensation for the CEO and other named executive officers is set around the median of the competitive market. The Committee sets the long-term incentive target compensation in dollars. This dollar target is converted to a mix of stock options and multi-year performance awards with overlapping performance cycles. This approach allows the Committee to establish goals for each cycle that reflect the current strategic business plan.

 

Stock options are granted with an exercise price equal to the fair market value on the date of grant and provide compensation value that is dependent on growth in the Corporation’s stock price. The performance award payouts in cash and stock can range from 0% to 200% of the target amount and the payouts are determined after the three-year results are evaluated against financial goals. A peer performance modifier, based on total return to shareowners over the three-year period, can drive an adjustment up or down by 20% of the amount otherwise payable under the performance awards. For further details on these long-term incentives, see “2007 Compensation, Long-Term Incentives” below.

 

Long-Term Incentives Performance Results.  The long-term performance awards have been strongly linked to performance results. The Committee has chosen to use a combination of stock options and performance cash or shares with multi-year performance cycles. The 2003 through 2006 awards were driven by organic sales growth and by return on sales (profit after tax divided by total sales) to encourage profitable growth. The return on sales goals for the 2003-2005 and 2004-2006 cycles reflected high historical margins with 9% or more return on sales and 8% per year organic sales growth. The Corporation not only exceeded these goals, but also exceeded the maximum return on sales goal for those cycles. As a result, the long-term incentive awards resulted in payments of 162% and 300% in 2005 and 2006, respectively, reflecting the Corporation’s strong performance. For the same cycles the Corporation’s total return to shareowners was over 100% (2003-2005 was 125%; 2004-2006 was 110%).

 

Due to the performance achievements by the Corporation, the Committee raised the return on sales goals higher for each cycle from 2004 through 2006 and starting with the 2006 through 2008 cycle also lowered the maximum payout available to participants from 300% of target to 200% of target.

 

Equity grant practices.  The Committee has a practice of approving long-term incentives (including stock options) at its November meeting each year. The meeting date is scheduled at least one year in advance. Stock options are granted with an exercise price equal to the closing price of the Corporation’s Common Stock on the date of the meeting that is the date of grant. This meeting follows the public release of annual earnings typically by one to

two weeks. The Corporation intends for the market to absorb the impact of its public release of year-end financial results before making the grant. The Committee on occasion will make grants at other regularly scheduled meetings when a new executive is named either as a result of an internal promotion or hiring. The Committee has delegated to the CEO the authority to make individual equity grants to positions below the designated senior executives. These grants are approved by the CEO on the date of a regularly scheduled meeting of the Board of Directors. The Committee reviews the use of this delegation at its November meeting each year.

 

Benefits.  The CEO and other named executive officers generally are covered by the same broad range of benefit programs available to other U.S. salaried employees of the Corporation. These benefits include medical, prescription drug, dental, vision, flexible spending accounts, pension and savings plans, employee stock purchase plan, life insurance, disability payments and vacation. The Corporation provides a broad array of benefit programs to attract and retain a skilled and highly talented workforce and to provide employees with choice to meet their personal needs. These benefits are compared to external benchmarks periodically to assure that they remain competitive and cost effective. It is the Corporation’s intention to provide a comprehensive benefits program that in total value is around the median of competitive practice.

 

Effective October 1, 2006 the Corporation froze its defined benefit pension plan applicable to the named executive officers and other salaried employees and shifted its emphasis to a defined contribution plan. The qualified and non-qualified defined benefit pension plans no longer accrue benefits for salary increases and service rendered by the named executive officers and other salaried employees after September 30, 2006. The pension plan was frozen to reduce the volatility of expense inherent in defined benefit pension plans. Effective October 1, 2006 the defined contribution savings plan was amended to include an additional corporate contribution using a percent of eligible earnings ranging from 0.5% to 6% based on age and service. No additional or special retirement benefits are provided to the CEO or other named executive officers after the pension freeze. For more information about the CEO and other named executive officer’s pension and savings plan benefits, see the Pension Benefits and the Non-Qualified Deferred Compensation Tables.

 

Deferral Plans.  To provide a tax-effective opportunity to save for retirement or other future needs, the Board of Directors has authorized compensation plans that allow for the elective deferral of the receipt of base salary and performance-based awards (annual incentive and long-term performance awards) when earned and otherwise payable to eligible employees. Eligible employees include the CEO, other named executive officers and a select group of other management and professional employees. Amounts deferred into the plan accrue earnings based on each participant’s selection of investment choices (“tracking funds”) that are generally similar to the core funds provided in the Corporation’s qualified savings plan.

 

Perquisites.  As part of a comprehensive executive compensation program, the Committee has provided the CEO and named executive officers certain annual perquisites, such as:

 

 

These perquisites are designed to be competitive within the industry that the Corporation competes for executive talent. They are reviewed annually by the Committee to assure that they continue to be competitive and consistent with the overall compensation philosophy. Details about the perquisites provided to the CEO and other named executive officers are included in the Summary Compensation Table and its footnotes.

 

2007 Compensation

 

At its November 2006 meeting, the Committee approved base salary and annual incentive targets for 2007. Long-term incentive grants in the form of stock options and performance awards for the period 2007 through 2009 were also made. At its November 2007 meeting the Committee approved annual incentive payments for 2007 and long-term incentive payments for the performance period 2005 through 2007. These actions are outlined below.

 

The alignment of pay with performance continued to show results in 2007. The performance of the Corporation for 2007 was strong in both the Commercial and Government Systems business units, exceeding the

long-term targets for both growth and financial performance. Earnings per share were 26% above the prior year while sales increased by 14%. Working capital as a percentage of sales decreased in 2007 to 8.1%. As a result, payouts for 2007 to the named executive officers for their annual and long-term incentives significantly exceeded their targets.

 

Base Salary

 

The Committee approved a base salary increase for the CEO effective on January 1, 2007 of 6.7% to bring his salary to $960,000, around the median for similar-sized companies in the general industry and peer group and to recognize the continuing strong performance by the Corporation and his achievements against his personal goals. The CEO recommended to the Committee base salary adjustments for the other named executive officers ranging from 6% to 15% using the same criteria — market position and performance — as for all other salaried employees.

 

Annual Incentives

 

Target Awards for 2007.  Target annual incentive amounts for the CEO and other named executive officers are reviewed annually by the Committee using the competitive information provided by the independent consultant. Target awards are set around the median of the competitive data for each position. The target awards are expressed as a percentage of annual salary. For 2007, the target annual incentive (as a percentage of base salary) for each named executive officer was as follows:

 

 

Performance Measures for 2007.  Prior to the beginning of each year, the CEO recommends to the Committee performance measures based on the annual operating plan that are most important to achieving the Corporation’s goals. For 2007, the Committee selected earnings per share, sales and working capital (defined as current assets excluding cash and deferred taxes, minus current liabilities excluding debt) as a percentage of sales. The working capital measure is based on an average of the measurement taken at the beginning of the year and the end of each quarter of the year.

 

Beginning in 2006, the Committee added key business goals as a fourth measure. These goals allow the Committee to consider non-financial performance that contributes to or detracts from the future success of the Corporation. These non-financial goals for 2007 (weighted 20% of the target award) included program wins, product deliveries, facility consolidation and enterprise diversity goals.

 

The weighting of these measures is evaluated each year. By weighting earnings per share and sales most heavily and equally at 35% each, the desired balance of sales growth and profit are reflected. In the early years after the spin-off of the Corporation from Rockwell, working capital management was weighted more heavily to encourage enhancement of performance in that key measure of success; due to significant improvements from 12.5% of sales in 2004 to a goal of 8.6% for 2007, that measure now represents a smaller portion of the total award at 10%.

 

Performance Goals for 2007.  For each of these measures, the Committee sets specific target goals based on the Corporation’s annual operating plan approved by the Board of Directors. A minimum threshold below which no payment will be made and “stretch” goals are set for each measure to establish the maximum payout range for the year.

 

Significant improvements in company performance over what was achieved in 2006, adjusted for acquisitions and non-recurring items, were required to earn target awards in 2007 as evidenced by the “% Change” column below:

 

Actual Performance and Payments for 2007.  The financial performance for 2007 and the Committee’s assessment of key business goals resulted in a payout of 171% of the target award before any adjustments for business unit and individual performance. The maximum payout was achieved for earnings per share and above target amounts were realized for sales, working capital and key business goals.

 

The Corporation’s 2007 actual performance, adjusted for acquisitions and certain other non-recurring items, on these financial goals, adjusted for acquisitions and non-recurring items, exceeded 2006 actual performance as shown below:

 

 

The Committee determined the specific achievements during the year for each of the key business goals. The Committee considered the assessment of performance on each goal individually and overall. Using their discretion and qualitative judgment, they assessed the overall performance as having exceeded the goals set by the Committee resulting in an above-target payout of 30% for the key business goals.

 

Payment to the CEO — The annual incentive payment to the CEO for 2007 that was determined by the Committee in executive session was $1,616,000 or 171% of his target award for 2007. No additional adjustment was made to the formula award.

 

Payments to the Named Executive Officers — The Committee reviewed and considered the CEO’s recommendations in approving annual incentive awards to the other named executive officers and other designated senior executives. Minor adjustments were made to the named executive officers’ incentives based on individual performance.

 

Long-Term Incentives

 

2007 Grant.  At its November 2006 meeting, the Committee provided for grants of stock options and three-year performance awards (for years 2007 through 2009) to the CEO, the other named executive officers and certain other employees under the 2006 Long-Term Incentives Plan after consultation with the independent consultant. The target awards in dollars for the CEO and other named executive officers were set after taking into account levels of responsibility, competitive market data and the relative contribution of each position to the business (i.e., internal equity or consistency between positions).

 

At its April 2007 meeting, the Committee reviewed trends in the forms of awards used by peer companies and the design of the long-term incentive plans with the independent consultant. Since 2006, the Committee has granted long-term incentives as stock options (50% of the target dollar value) and a multi-year performance award (50% of the target dollar value with half in cash and half in performance shares) to provide balance to encourage achievement of multi-year financial goals and increased shareowner value. To further strengthen the emphasis on balancing these key success factors and to align with enhancing shareowner value, the Committee determined that it would, beginning in November 2007, provide the long-term incentives grant as 50% stock options and 50% performance shares for performance over a three-year period. The cash portion of the performance award will be eliminated.

 

Stock Options — 50% of the 2007 target dollar value for each named executive officer’s long-term incentive award was granted as stock options. The exercise price of the options is the fair market value defined as the closing sale price of the stock as reported in the New York Stock Exchange-Composite Transactions on the date of grant and the options vest in three equal amounts on the first, second and third anniversary of the grant. The number of stock options is determined on the date of grant by dividing the target stock option compensation in dollars by the fair market value of one stock option (using an option pricing model for valuation) and rounded up to the nearest 100 shares.

 

Performance Awards — 50% of the 2007 target dollar value for each named executive officer’s long-term incentive award was granted by the Committee in the form of a three-year performance award (denominated half in

cash and half in performance shares) for achievement of pre-established financial goals for the years 2007 through 2009. The financial goals, based on the strategic plan approved by the Board of Directors, focus on long-term profitable growth of the Corporation — measured by return on sales and cumulative sales — and total return to shareowners relative to peer companies. These measures reflect the importance of long-term financial performance balanced by its impact on total return to shareowners.

 

Financial goals:

 

 

Peer performance modifier:

 

 

 

 

The total shares awarded in November 2006 for stock options and performance shares at target payout represent 0.3% of total shares outstanding as of the date of grant.

 

The Committee will review management’s achievement of the pre-established financial goals at its November 2009 meeting and determine the payment, if any, earned by participants under the 2007 performance awards.

 

Cash Performance Unit Payment for the period ending in 2007.  In November 2007, the Committee determined the payments to participants for the three-year cash performance unit granted in November 2004 covering the years 2005 through 2007. The pre-established goals for the three-year period were for cumulative sales and return on sales. Performance for the three-year performance period is summarized below:

 

 

 

Based on the Corporation’s strong performance during the three-year period for cumulative sales growth and return on sales against the pre-established performance goals, payment of 300% of target awards was made to 113 executives of the Corporation, including the CEO and other named executive officers, based on the formula established for the awards. The Committee made no other adjustments to the final award. The CEO received a payment in November 2007 of $1.8 million resulting from the three-year performance at 300% of his target award. This performance award payout represented the last cycle that included maximum payouts up to 300% of the target. All subsequent awards include maximum payouts at 200%, subject to any peer performance modifier.

 

Compensation for 2008

 

At the November 2007 meeting of the Committee, the independent consultant presented competitive benchmark data for named executive officers’ compensation and the CEO reviewed the performance of the other named executive officers and designated senior executives. In addition, based on the competitive report provided by the independent consultant, the Committee considered the CEO’s recommendation in approving target annual incentives for 2008 and long-term incentive grants made up of stock options and three-year performance share awards that are dependent on the Corporation’s performance for the years 2008 through 2010 for cumulative sales, return on sales and total shareowner return. For the other named executive officers, the annual incentive targets were increased five percentage points for the chief operating officers and general counsel and ten percentage points for the chief financial officer. The long-term incentive target values were increased by $50,000 for two of the named executive officers who are relatively new to their positions. These adjustments were made to remain competitive with the median of the benchmark data. The performance goals for 2008 through 2010 were increased over prior cycles for the fourth consecutive cycle.

 

The Committee met in executive session with the CEO to discuss his performance for 2007. The Committee then met in executive session with the independent consultant and without the CEO present to discuss CEO compensation. They reviewed the Corporation’s results for 2007 and established the CEO’s annual incentive payment (as outlined above) and 2005 through 2007 cash performance unit payment according to the pre-established formula approved in 2004. Based on the input of the independent consultant and after consulting with the other members of the Board of Directors, the Committee approved a base salary increase for the CEO of 4% to $1 million annually to be effective January 1, 2008, the 2008 target annual incentive at 100% of base earnings and a long-term incentive target award of $3 million made up of stock options and a three-year performance share award payable for achievement of pre-established goals for return on sales, cumulative sales and total return to shareowners for the performance period of fiscal years 2008 through 2010. The long-term incentive target for the CEO was increased by 25% over prior years to remain competitive with the median of the benchmark compensation data reported by the independent consultant.

 

Stock Ownership Guidelines

 

The Committee believes that senior executives should have a significant equity interest in the Corporation. To promote equity ownership and further align the interests of senior executives with the Corporation’s shareowners, the Committee increased ownership guidelines for senior executives in 2006.

 

These guidelines require that each executive officer own shares of the Corporation’s common stock with a market value of at least a specified multiple of their salary within a predetermined time period. At the Committee’s April 2006 meeting, the guidelines were increased to six times salary for the CEO, three times salary for the other named executive officers and two times salary for certain other executive officers. Progress toward meeting the higher guidelines was reviewed by the Committee at its April 2007 meeting and it is expected that the ownership guidelines will be met by January 1, 2012, the time period established by the Committee in 2006.

 

The Corporation considers all shares held as follows toward meeting the ownership requirements: shares owned outright (including in trusts and those held by a spouse), shares in the qualified savings plan, share equivalents held in the non-qualified savings plan, and shares in the employee stock purchase plan. Unexercised stock options and unearned performance shares are not included toward meeting the target.

Employment, Severance and Change of Control Agreements

 

The Committee does not generally enter into employment contracts with the executive officers, including severance arrangements. The executives serve at the will of the Board. This approach allows for removal of an executive officer prior to retirement whenever it is in the best interest of the Corporation to do so, with discretion on whether to provide any severance package (excluding vested benefits). On the rare occasion when an executive officer is removed, the Committee exercises its business judgment in approving any appropriate separation agreement in light of all relevant circumstances, including the individual’s term of employment, past accomplishments and reasons for separation.

 

The Committee has approved change of control employment agreements with each of the named executive officers and with certain other executives. The current agreements were approved after reviewing the competitive benchmark data for similar arrangements with the independent consultant. The Committee has adopted these agreements to provide executive officers with a strong incentive to remain with the Corporation if there is a change of control, or the threat of such a transaction, and to maintain a competitive total compensation program. These change of control employment agreements also protect executives if they are terminated by the acquirer following the change of control. The payments are subject to a “double trigger” requiring that a change of control occur and a termination, or constructive termination, of employment also occur. Since constructive termination can be open to interpretation, the agreements also provide a 30-day period one year after the change of control during which the executive can exercise the right to leave the Corporation and collect the severance benefits (however, the benefits in these circumstances are reduced by 50% except long-term incentive awards paid under the terms of a separate shareowner approved plan). These agreements are set to be re-evaluated on or before June 2009.

 

The Committee has provided for special treatment of long-term incentive awards upon death, disability and retirement, as well as change of control. The Committee evaluates these provisions from time to time and believes they are appropriate as part of a competitive total compensation program. For additional details about the terms and potential payments in the event of change of control and other separations, see the discussion of “Potential Payments upon Termination or Change in Control.”

 

Payment Recovery Provisions

 

Executive officers are subject to certain restrictive agreements that could be relevant upon a termination of employment, including confidentiality restrictions, mutual arbitration agreements, non-competition covenants and employee non-solicitation arrangements. An executive could lose all outstanding long-term incentives and/or be required to refund various long-term incentive benefits realized in the prior two-year period for breaching the non-compete or non-solicitation restrictions.

 

The CEO and CFO could also be required by law to reimburse the Corporation for certain incentive compensation amounts received associated with misconduct leading to an accounting restatement.

 

Tax Deductibility of Executive Compensation

 

Under Internal Revenue Code Section 162(m), a publicly held Corporation may not deduct in any taxable year compensation in excess of one million dollars paid in that year to its CEO and its other named executive officers unless the compensation is “performance based.” Awards under the Senior Executive Incentive Compensation Plan, grants of stock options and grants of performance awards are designed to be “performance based” compensation. Since the Committee retains discretion with respect to base salaries and certain other compensation awards, those elements would not qualify as “performance based” compensation for these purposes. For year 2007, the Committee believes that all of the compensation for the named executive officers is deductible under this tax code provision.

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee of the Board of Directors acts on behalf of the Board to establish and oversee the executive compensation program in a manner that serves the interests of the Corporation and its shareowners. For a discussion of the policies and procedures, see Corporate Governance; Board of Directors and Committees — Compensation Committee.

 

Management of the Corporation prepared the Compensation Discussion and Analysis of the compensation program for named executive officers. We reviewed and discussed the Compensation Discussion and Analysis for fiscal year 2007 (included in this proxy statement) with management. Based on this review and discussion, we recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference in the 2007 Form 10-K for the year ended September 30, 2007, for filing with the Securities and Exchange Commission. The Board has approved that recommendation.

 

Compensation Committee

Anthony J. Carbone, Chairman

Mark Donegan

Joseph F. Toot, Jr.

 

SUMMARY COMPENSATION TABLE FOR 2007

 

The following table sets forth information concerning compensation, from all sources, paid to or earned by our chief executive officer, chief financial officer and our other three most highly compensated executive officers at September 30, 2007, plus one other person who was an executive officer during 2007 and would have been included as one of our other three most highly compensated executive officers if he had remained an executive officer at September 30, 2007 (the “named executive officers”), for services rendered in all capacities to us and our subsidiaries for the 2007 fiscal year.

 

 

 

 

 

GRANTS OF PLAN-BASED AWARDS

 

Shown below is information on grants to the Named Executive Officers of plan-based awards during fiscal year 2007.

 

 

 

 

Annual Incentive Compensation Plan

 

The Annual Incentive Compensation Plan is an incentive plan with payouts based on the achievement of specific financial goals and key business goals that are aligned with our annual operating plan as approved by the Board of Directors. It includes specific goals for sales, earnings per share and working capital as a percentage of sales and non-financial goals (“key business goals”) in the categories of growth/program pursuits, operational excellence and people goals. Annual incentive payments can range from 0% to 200% of the incentive target based on our performance achieved against the financial and key business goals. Individual performance adjustments can be made to the incentive payments. The 2006 Annual Incentive Compensation Plan for Senior Executive Officers (Senior Executive Plan), approved by shareowners at the 2006 Annual Meeting, provides for an IRS Section 162(m) compliant maximum amount for the incentive awards that can be allocated each year to the named executive officers based on a percentage of pre-tax segment operating earnings. The Senior Executive Plan generally yields a potential incentive payout to the named executive officers that is significantly higher than the incentive payout to the named executive officers calculated in accordance with the incentive plan applicable to a broader group of executives. The Compensation Committee regularly exercises its discretion under the Senior Executive Plan to reduce and more closely align the actual payout to the named executive officers with the more broadly applicable incentive plan.

 

Performance Units and Performance Shares

 

Performance awards are based on three-year performance periods tied to established targets for cumulative sales and return on sales. Payouts can range from 0% to 200%. In addition, the awards include a potential multiplier adjustment up or down by 20 percent depending on the Corporation’s total return to shareowners (share price growth plus dividend yield) measured against a group of ten peer companies. If performance is with the top three peer companies, 20 percent of the amount otherwise payable will be added to the award. If performance is with the middle four companies, no adjustment will be made. If performance is with the bottom three peer companies, a reduction of 20 percent of the amount otherwise payable will be made to the final award. The actual cash or share amount, to the extent earned, will be determined after the applicable three-year period is complete. The performance units are payable in cash while the performance shares are payable in shares of Common Stock.

 

Stock Options

 

The provisions of the stock option grants are as follows:

 

 

General

 

For further information about these plan-based awards, see the “Compensation Discussion and Analysis.”

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

The following table provides outstanding stock options and unvested stock awards information for the named executive officers as of September 30, 2007.

 

 

 

OPTION EXERCISES AND STOCK VESTED

 

The following table shows (i) exercises by the named executive officers during 2007 of options to purchase Common Stock granted under our equity compensation plans; and (ii) vestings of stock, including restricted stock, restricted stock units and similar instruments for the named executive officers in 2007.

 

 

 

 

PENSION BENEFITS

 

The following table provides information as of September 30, 2007 (the pension measurement date for purposes of the Corporation’s financial statements) for each named executive officer regarding retirement benefits under our qualified and non-qualified pension plans.

 

 

 

 

In September 2006, we froze our qualified and non-qualified defined benefit pension plans applicable to the named executive officers and certain other salaried employees and shifted our emphasis to a defined contribution plan. Set forth below is further disclosure relating to these qualified and non-qualified defined benefit pension plans that have been frozen.

 

We maintain qualified and non-qualified defined benefit pension plans for our employees. As part of the 2001 spin-off from Rockwell, all of the qualified defined benefit pension plans were merged into one plan and renamed the Rockwell Collins Pension Plan (“Qualified Pension Plan”). Effective September 30, 2006, the plan was amended to discontinue benefit accruals for salary increases and services rendered after that date, other than for employees covered by collective bargaining agreements. The annual incentive paid in December 2006 for service rendered through September 30, 2006 is included in the defined benefit accruals. Each of the current named executive officers is eligible for a benefit under the Qualified Pension Plan that is included in the totals above. Benefit calculations for each named executive officer are unique depending on age, years of service and average annual covered compensation. Covered compensation includes salary and annual incentive.

 

We also maintain a non-qualified supplemental defined benefit pension plan (the Rockwell Collins Non-Qualified Pension Plan (“NQ Pension Plan”)) to provide eligible employees, including the named executive officers, with supplemental pension benefits in excess of the maximum benefit allowed under the Qualified Pension Plan by reason of limitations of the Internal Revenue Code. A participant’s supplemental retirement benefit is generally based on a continuation of the participant’s benefit calculation formula under the Qualified Pension Plan.

 

Executive officers hired after January 1, 1993 are covered by an enhanced early build-up retirement benefit provision broadly available to the other salaried sub-plan participants hired before 1993. This benefit was also frozen on September 30, 2006.

The present value of the accumulated pension benefit for each named executive officer is calculated using a 6.6% discount rate as of September 30, 2007, and a retirement age of 62, the earliest age an executive can retire without a reduction in benefits. The form of payment assumes a weighted average of a joint and 60% survivor annuity and a single life annuity. For further discussion related to our pension assumptions, see Note 11 of the Notes to Consolidated Financial Statements of our 2007 Annual Report to Shareowners.

 

The Qualified Pension Plan does not have a lump sum option. Payments from the NQ Pension Plan are made in the same form and at the same time as payments from the Qualified Pension Plan for service prior to 2005. The Corporation adopted the 2005 Non-Qualified Pension Plan (“2005 NQ Pension Plan”) to comply with the requirements of the Internal Revenue Code Section 409A for non-qualified benefits earned after 2004. Under the 2005 NQ Pension Plan, participants will make an election at the end of 2007 as to the form and timing of the payments that will be made upon separation from the Corporation. For benefits payable under the 2005 NQ Pension Plan, participants can elect an annuity, one lump sum or up to ten annual installments.

 

We have established a master rabbi trust relating to the NQ Pension Plan. The master rabbi trust requires that, upon a change of control, we fund the trust in a cash amount equal to the unfunded accrued liabilities of the NQ Pension Plan as of such time.

 

NON-QUALIFIED DEFERRED COMPENSATION

 

The table below provides information on the non-qualified deferred compensation of the named executive officers in 2007, including:

 

Deferred Compensation Plan.  The plan allows eligible employees to defer a portion of their income and earnings until a future date when distributions are received from the plan. Participation in the plan is an annual decision that covers only the upcoming calendar year and must be made during each year’s annual enrollment period. The participants are not allowed to change their deferral election during the year.

 

The named executive officers may elect to defer up to 50% of base salary and/or as much as 100% of any annual incentive award. With respect to distributions, the named executive officers may elect to receive their balance on a future specified date, at retirement (up to 15 annual installments or as a lump sum) or upon termination (lump sum only). All deferrals of base salary and/or incentive awards made in a calendar year will be subject to the same distribution election.

 

The named executive officers can choose any of the measurement funds offered by the plan and have the ability to change their investment election at any time. The measurement fund options are intended to mirror as closely as possible the performance of underlying mutual funds.

 

Separate deferral and distribution elections are made for performance awards (long-term incentives).

 

Non-Qualified Savings Plan.  The primary purpose of the Corporation’s non-qualified savings plan (“Non-Qualified Savings Plan”) is to supplement the Corporation’s qualified savings plan (“Qualified Savings Plan”) by allowing employees to receive credits for contributions that would have been made to the Qualified Savings Plan, but could not be made due to the Internal Revenue Code compensation limit or annual additions limit. Additionally, employees receive similar credits for amounts that would have been contributed to the Qualified Savings Plan as company matching contributions and company retirement contributions. Company contributions include credits equal to 75% of the first 8% of the executive’s base salary, and company retirement credits equal to a percentage of eligible compensation, such percentage determined based on each executive’s age and length of service.

 

The named executive officers may defer up to 50% of base salary to the plan. To comply with Internal Revenue Code Section 409A regulations, the contribution percent in effect for the Qualified Savings Plan on December 31 of the prior year will be the contribution percent in effect for the current year in the Non-Qualified Savings Plan. With respect to distributions, contributions made prior to 2005 permit participants to receive their balance upon termination of employment either through a lump sum payment or in annual installments up to 10 years. Contributions made in 2005 through 2007 are paid in lump sum only upon termination of employment.

The Corporation adopted the 2005 Non-Qualified Savings Plan in September 2007 to comply with Internal Revenue Code Section 409A requirements.

 

The investment funds available for the employee and company credits are identical to the investment funds in the Qualified Savings Plan. Investment elections to the Non-Qualified Savings Plan are made independently from the Qualified Savings Plan. Contribution credits not directed to a specific investment fund will be invested in a Fidelity Freedom Fund designed for a target retirement date that is closest to the date that the employee turns age 65. Employees may transfer credits to other investment funds within the plan at any time.

 

Distributions for the Deferred Compensation Plan and Non-Qualified Savings Plan are processed within the first 60 days of the calendar year following the year that an employee terminates or retires. However, if the named executive officer terminates or retires after June 30, the distribution will be processed within the first 60 days following June 30 of the following calendar year.

 

Non-Qualified Deferred Compensation

 

 

 

 

 

 

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

 

The following information and table set forth the amount of payments to each of our named executive officers in the event of death, disability or termination of employment as a result of certain triggering events. The table also sets forth the amount of payments to each of our named executive officers in the event of a change in control without a termination of employment. Note, however, that the change in control agreements discussed in further detail below principally provide for the payment of benefits only in the event of a termination of employment after a change in control and not upon the change in control itself.

 

We do not generally enter into employment contracts with our executive officers nor do we have any severance plan or arrangement for our executive officers. The executives serve at the will of the Board. This approach allows us to remove an executive officer prior to retirement whenever it is in the best interest of the Corporation, with discretion on whether to provide any severance package (excluding vested benefits). On the rare occasion when an executive officer is removed, the Corporation exercises its business judgment in approving any appropriate separation agreement in light of all relevant circumstances, including the individual’s term of employment, past accomplishments and reasons for separation.

 

Executive officers are subject to certain restrictive agreements with us that could be relevant upon a termination of employment, including confidentiality restrictions, mutual arbitration agreements, non-competition covenants and employee non-solicitation arrangements. An executive could lose all outstanding long-term incentives and/or be required to refund various long-term incentive benefits realized in the prior two-year period for breaching these non-compete or non-solicitation restrictions.

 

Assumptions and General Principles.  The following assumptions and general principles apply with respect to the table below and any termination of employment of a named executive officer. The amounts shown in the table assume that each named executive officer was terminated on September 30, 2007. Accordingly, the table includes estimates of amounts that would be paid to the named executive officer upon the occurrence of a termination or change in control. The actual amounts to be paid to a named executive officer can only be determined at the time of the termination or change in control.

 

A named executive officer is entitled to receive amounts earned during his term of employment regardless of the manner in which the named executive officer’s employment is terminated. These amounts include base salary and unused vacation. These amounts are not shown in the table because they are not specifically related to the termination of employment.

 

Pursuant to the awards under the Long-Term Incentives Plans, a named executive officer who terminates employment by death, disability or retirement during the performance period under the award is eligible to receive a pro-rata payment for the portion of the period that elapsed prior to the termination of employment. In the event of a voluntary termination or a termination for cause before the end of the performance period, no payments will be made. See the discussion of “Long-Term Incentives” in the “Compensation Discussion and Analysis” section earlier in this proxy statement for a description of our long-term incentive compensation plans.

 

A named executive officer may exercise any stock options that are exercisable prior to the date of termination. Any payments related to these exercisable stock options are not included in the table because they are not specifically related to the termination of employment.

 

A named executive officer will be entitled to receive all amounts accrued and vested under our retirement and savings programs, pension plans and deferred compensation plans in which the named executive officer participates. These amounts will be determined and paid in accordance with the applicable plan and are not included in the table because they are not specifically related to the termination of employment. Certain of these amounts are set forth in the “Pension Benefits” table and the “Non-Qualified Deferred Compensation Table”.

 

Normal and Early Retirement.  A Named Executive Officer is eligible to elect normal retirement at age 65 and early retirement between the ages of 55 and 64. All of our full-time salaried employees hired prior to October 1, 2006 with at least ten years of service are eligible for health care and life insurance benefits upon normal retirement subject to the terms of the plans. In addition, upon normal and early retirement, all outstanding stock options will continue to vest in accordance with their terms and be exercisable for up to five years from retirement.

As of September 30, 2007 and apart from Mr. Chiusano, none of the named executive officers was eligible for normal retirement, and only Mr. Jones was eligible for early retirement.

 

On October 2, 2006, Mr. Chiusano ceased serving as Executive Vice President and Chief Operating Officer of Commercial Systems, and was appointed Executive Vice President and Special Assistant to the Chief Executive Officer. On March 31, 2007, Mr. Chiusano retired as an employee of the Corporation. The payments and benefits provided to Mr. Chiusano in 2007 and the payments and benefits that will be provided to him in the future are described below.

 

 

Death and Disability.  In the event of the death of a named executive officer, all outstanding stock options will immediately vest and become exercisable. The amounts set forth in the table for stock options reflect the difference between the closing price of our common stock on September 30, 2007 and the exercise prices for each option for which vesting accelerated.

 

In the event of the disability of a named executive officer, all stock options will continue to vest in accordance with their terms and the Corporation’s practices.

 

Each named executive officer is eligible for company-paid life insurance. Under our life insurance program, the beneficiary of a named executive officer is entitled to receive a death benefit equal to one times his annual salary. Life insurance benefits are not shown in the table because the one times salary amount is based on the same formula as that generally available to all salaried employees.

 

Each named executive officer also participates in our disability insurance programs, which consist of salary continuation, short-term disability, and long-term disability. The salary continuation and short-term disability benefits for named executive officers are based on the same formula as those generally available to all salaried employees, and are not shown in the table. For purposes of these programs, “disability” is defined as a condition caused by a non-occupational accident or sickness that results in an inability of the employee to do his or her job, and the inability to do any other job for which he or she is fit by education, training, or experience. The executive long-term disability program pays as follows: Upon the occurrence of a disability under the program, a named executive officer will receive a monthly benefit equal to 50% of base salary and 50% of the monthly average of the executive’s last five annual incentive pay awards until the earlier of: (a) age 65; (b) recovery from the disability; (c) the date the named executive officer begins receiving retirement plan benefits; or (d) death. The amounts set forth in the table reflect the amount of the first year’s payments under the program and only reflect those amounts in excess of long-term disability benefits that would be generally available to all salaried employees.

Voluntary Termination and Termination for Cause.  A named executive officer is not entitled to receive any additional forms of severance payments or benefits upon his voluntary decision to terminate employment with the Corporation prior to being eligible for retirement or upon termination of employment by the Corporation for cause.

 

Change in Control.  We have entered into change in control employment agreements with each of the named executive officers. Forms of these agreements have been publicly filed as exhibits to our reports filed with the SEC. Each employment agreement is set to expire in June 2009 and becomes effective upon a “change of control” of the Corporation during the term, as follows: