SCHEDULE 14A

(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

 

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

 

Filed by the Registrant x

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o      Preliminary Proxy Statement

o      Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

x      Definitive Proxy Statement

o      Definitive Additional Materials

o      Soliciting Material Pursuant to Rule 14a-12

 

L-3 COMMUNICATIONS HOLDINGS, INC.
(Name of Registrant as Specified in Its Charter)

 

Payment of Filing Fee (Check the appropriate box):

 

x      No fee required.

L-3 COMMUNICATIONS HOLDINGS, INC.

 

 

To Our Stockholders:

 

On behalf of the Board of Directors, I cordially invite you to attend the Annual Meeting of Stockholders of L-3 Communications Holdings, Inc., to be held at 2:30 p.m., Eastern Daylight Time, on Tuesday, April 26, 2011, at the Ritz-Carlton New York, Battery Park, located at Two West Street, New York, New York. The notice and proxy statement for the Annual Meeting are attached to this letter and describe the business to be conducted at the Annual Meeting.

 

In accordance with the rules of the Securities and Exchange Commission, we sent a Notice of Internet Availability of Proxy Materials on or about March 14, 2011 to our stockholders of record as of the close of business on March 1, 2011. We also provided access to our proxy materials over the Internet beginning on that date. If you received a Notice of Internet Availability of Proxy Materials by mail and did not receive, but would like to receive, a printed copy of our proxy materials, you should follow the instructions for requesting such materials included on page 4 of this proxy statement or in the Notice of Internet Availability of Proxy Materials.

 

To have your vote recorded, you should vote over the Internet or by telephone. In addition, if you have requested or received a paper copy of the proxy materials, you can vote by signing, dating and returning the proxy card sent to you in the envelope accompanying the proxy materials sent to you. We encourage you to vote by any of these methods even if you currently plan to attend the Annual Meeting. By doing so, you will ensure that your shares are represented and voted at the Annual Meeting. If you decide to attend, you can still vote your shares in person if you wish. Please let us know whether you plan to attend the Annual Meeting by indicating your plans when prompted over the Internet voting system or the telephone or (if you have received a paper copy of the proxy materials) by marking the appropriate box on the proxy card sent to you.

 

On behalf of the Board of Directors, I thank you for your cooperation and look forward to seeing you on April 26th.

 

Very truly yours,

 

Michael T. Strianese

Chairman, President and
 Chief Executive Officer

TABLE OF CONTENTS

 

L-3 COMMUNICATIONS HOLDINGS, INC.

 

 

Notice is hereby given that the 2011 Annual Meeting of Stockholders (the “Annual Meeting”) of L-3 Communications Holdings, Inc. (“L-3” or the “Company”) will be held at the Ritz-Carlton New York, Battery Park, located at Two West Street, New York, New York on Tuesday, April 26, 2011, at 2:30 p.m., Eastern Daylight Time, for the following purposes:

 

 

 

By Order of the Board of Directors

 

Steven M. Post

Senior Vice President, General Counsel and

 Corporate Secretary

 

March 14, 2011

 

 

 

L-3 Communications Holdings, Inc.
600 Third Avenue
New York, New York 10016

 

 

This proxy statement is being made available to the holders of the common stock, par value $0.01 per share, of L-3 Communications Holdings, Inc. (the “Common Stock”) in connection with the solicitation of proxies for use at the Annual Meeting to be held at the Ritz-Carlton New York, Battery Park, located at Two West Street, New York, New York at 2:30 p.m., Eastern Daylight Time, on Tuesday, April 26, 2011.

 

RECORD DATE

 

Our Board of Directors has fixed the close of business on March 1, 2011 as the Record Date (the “Record Date”) for the Annual Meeting. Only stockholders of record at the Record Date are entitled to notice of, and to vote at, the Annual Meeting or at any adjournments or postponements thereof, in person or by proxy. At the Record Date, there were 108,090,470 shares of our Common Stock outstanding and entitled to vote at the Annual Meeting. Each holder of Common Stock is entitled to one vote for each share of our Common Stock held by such holder. The holders of a majority of the outstanding shares of our Common Stock entitled to vote generally in the election of directors, represented in person or by proxy, shall constitute a quorum at the Annual Meeting.

 

On or about March 14, 2011, we either mailed you a notice (the “Notice”) notifying you how to vote online and how to electronically access a copy of this proxy statement, our Summary Annual Report and our Annual Report on Form 10-K for the year ended December 31, 2010 (together referred to as the “Proxy Materials”) or mailed you a complete set of the Proxy Materials. If you have not received but would like to receive printed copies of these documents, including a proxy card in paper format, you should follow the instructions for requesting such materials contained in the Notice.

 

PROXIES

 

The proxies are solicited by our Board of Directors on our behalf for use at the Annual Meeting and any adjournments or postponements of the Annual Meeting, and the expenses of solicitation of proxies will be borne by us. The solicitation will be made primarily via the Internet and by mail, but our officers and regular employees may also solicit proxies by telephone, telegraph, facsimile, or in person. We also have retained Georgeson Inc. to assist in soliciting proxies. We expect to pay Georgeson Inc. approximately $10,000 plus expenses in connection with its solicitation of proxies.

 

Each stockholder may appoint a person (who need not be a stockholder), other than the persons named in the proxy, to represent him or her at the Annual Meeting by completing another proper proxy. In either case, such completed proxy should be returned in the envelope provided to you for that purpose (if you have requested or received a paper copy of the Proxy Materials) or should be delivered to L-3 Communications Holdings, Inc. c/o Computershare Investor Services, P.O. Box 43102, Providence, Rhode Island 02940-5068, not later than 1:00 a.m., Eastern Daylight Time, on Tuesday, April 26, 2011 or by 10:00 a.m. Eastern Daylight Time on Thursday, April 21, 2011 if you own shares through L-3’s 401(k) plan.

 

Any proxy delivered pursuant to this solicitation is revocable at the option of the person(s) executing the proxy upon our receipt, prior to the time the proxy is voted, of a duly executed instrument revoking it, or of a duly executed proxy bearing a later date, or by such person(s) voting in person at the Annual Meeting. Unless revoked, all proxies representing shares entitled to vote that are delivered pursuant to this solicitation will be voted at the Annual Meeting and, where a choice has been specified on the proxy card, will be voted in accordance with such specification. Where a choice

has not been specified on the proxy card, the proxy will be voted in accordance with the recommendations of our Board of Directors.

 

Assuming a quorum is present, a majority of the votes cast at the Annual Meeting is required for (1) the election of directors; (2) the ratification of the appointment of the independent registered public accounting firm; (3) the non-binding and advisory approval of the compensation paid to our named executive officers; and (4) the non-binding and advisory determination of whether the vote to approve the compensation paid to our named executive officers will occur every one, two or three years. Abstentions and instances where brokers are prohibited from exercising discretionary authority for beneficial owners who have not returned a proxy (so-called “broker non-votes”) will be counted for purposes of determining a quorum. In determining whether (i) a director nominee has been elected by the stockholders; (ii) the compensation paid to our named executive officers has been approved; and (iii) the vote to approve the compensation paid to our named executive officers will occur every one, two or three years, abstentions and “broker non-votes” will have no effect on the outcome of any of these proposals. Finally, for the selection of the independent registered public accounting firm, abstentions will have no effect on the outcome of this proposal.

 

VOTING IN PERSON

 

If you are a stockholder of record and prefer to vote your shares at the Annual Meeting, you must bring proof of identification along with your Notice or the admission ticket attached to your proxy card if you received a paper copy. You may vote shares held in street name at the Annual Meeting only if you obtain a signed proxy from the record holder (broker or other nominee) giving you the right to vote the shares.

 

Even if you plan to attend the Annual Meeting, we encourage you to vote in advance by Internet, telephone or (if you received a paper copy of the Proxy Materials) by mail so that your vote will be counted even if you later decide not to attend the Annual Meeting. Voting your proxy by the Internet, telephone or mail will not limit your right to vote at the Annual Meeting if you later decide to attend in person. If you own your shares of our Common Stock through a bank, brokerage firm or other record holder and wish to vote in person at the Annual Meeting, you must request a “legal proxy” from your bank or broker or obtain a proxy from the record holder.

 

VOTING BY INTERNET, TELEPHONE OR MAIL

 

The following sets forth how a stockholder can vote over the Internet, by telephone or by mail:

 

Voting By Internet

 

If you hold your shares of our Common Stock through a bank or brokerage firm (i.e., you are not a registered holder), you can vote at: www.proxyvote.com, 24 hours a day, seven days a week. You will need the 12-digit Control Number included on your Notice or your paper voting instruction form (if you received a paper copy of the Proxy Materials).

 

If you own your shares of our Common Stock directly in your name in our stock records maintained by our transfer agent, Computershare Trust Company, N.A., or through L-3’s 401(k) plan, you can vote at: www.investorvote.com/LLL, 24 hours a day, seven days a week. You will need the 15-digit Control Number included on your paper proxy card.

 

Voting By Telephone

 

If you hold your shares of our Common Stock through a bank or brokerage firm, you can vote using a touch-tone telephone by calling the toll-free number included on your paper voting instruction form (if you received a paper copy of the Proxy Materials), 24 hours a day, seven days a week. You will need the 12-digit Control Number included on your paper voting instruction form.

If you own your shares of our Common Stock directly in your name in our stock records maintained by our transfer agent, Computershare Trust Company, N.A., or through L-3’s 401(k) plan, you can vote using a touch-tone telephone by calling 1-800-652-VOTE (8683), 24 hours a day, seven days a week. You will need the 15-digit Control Number included on your paper proxy card.

 

If you hold your shares in street name, you may also submit voting instructions to your bank, broker or other nominee. In most instances, you will be able to do this over the Internet, by telephone, or by mail. Please refer to the information from your bank, broker or other nominee on how to submit voting instructions.

 

The Internet and telephone voting procedures, which comply with Delaware law and the Securities and Exchange Commission (the “SEC”) rules, are designed to authenticate stockholders’ identities, to allow stockholders to vote their shares and to confirm that their instructions have been properly recorded.

 

Voting By Mail

 

If you have received a paper copy of the Proxy Materials by mail, you may complete, sign, date and return by mail the paper proxy card or voting instruction form sent to you in the envelope provided to you with your Proxy Materials or voting instruction form.

 

Deadline for Submitting Votes By Internet, Telephone or Mail

 

If you hold your shares of our Common Stock through a bank or brokerage account, proxies submitted over the Internet or by telephone as described above must be received by 11:59 p.m., Eastern Daylight Time, on Monday, April 25, 2011.

 

If you own your shares of our Common Stock directly in your name in our stock records maintained by our transfer agent, Computershare Trust Company, N.A., proxies submitted over the Internet or by telephone as described above must be received by 1:00 a.m., Eastern Daylight Time, on Tuesday, April 26, 2011.

 

If you own your shares of our Common Stock through L-3’s 401(k) plan, proxies submitted over the Internet or by telephone as described above must be received by 10:00 a.m., Eastern Daylight Time, on Thursday, April 21, 2011.

 

Proxies submitted by mail should be returned in the envelope provided to you with your paper proxy card or voting instruction form, not later than 1:00 a.m., Eastern Daylight Time, on Tuesday, April 26, 2011 or by 10:00 a.m., Eastern Daylight Time, on Thursday, April 21, 2011 if you own your shares through L-3’s 401(k) plan.

 

Revocation of Proxies Submitted by Internet, Telephone or Mail

 

To revoke a proxy previously submitted over the Internet, by telephone or by mail, you may simply vote again at a later date, using the same procedures, in which case your later submitted vote will be recorded and your earlier vote revoked. You may also attend the Annual Meeting and vote in person.

 

 

 

 

Our Amended and Restated Certificate of Incorporation provides for a classified Board of Directors divided into three classes: John M. Shalikashvili, Michael T. Strianese and John P. White constitute a class with a term that expires at the Annual Meeting in 2011 (the “Class I Directors”); Lewis Kramer, Robert B. Millard and Arthur L. Simon constitute a class with a term that expires at the Annual Meeting of Stockholders in 2012 (the “Class III Directors”); and Claude R. Canizares, Thomas A. Corcoran and Alan H. Washkowitz constitute a class with a term that expires at the Annual Meeting of Stockholders in 2013 (the “Class II Directors”). On February 24, 2011, General (Ret.) Shalikashvili notified the Company that he intends to retire on the date of the Company’s Annual Meeting and, accordingly, will not stand for re-election as a Class I director to the Company’s Board of Directors.

 

The full Board of Directors has considered and nominated the following slate of Class I nominees for a three-year term expiring in 2014: H. Hugh Shelton, Michael T. Strianese and John P. White. Action will be taken at the Annual Meeting for the election of these three nominees.

 

It is intended that the proxies delivered pursuant to this solicitation will be voted in favor of the election of H. Hugh Shelton, Michael T. Strianese and John P. White except in cases of proxies bearing contrary instructions. In the event that these nominees should become unavailable for election due to any presently unforeseen reason, the persons named in the proxy will have the right to use their discretion to vote for a substitute.

 

NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS IN 2011

 

The following information describes the offices held, other business directorships and the class and term of each nominee. Beneficial ownership of equity securities of the nominees is described in “Security Ownership of Management” on page 27.

 

Class I — Directors Whose Term Will Expire in 2014

 

The nominees for election to the Board of Directors are hereby proposed for approval by the stockholders. Assuming a quorum is present, a majority of the votes cast at the Annual Meeting is required for the election of each nominee.

 

The Board of Directors Recommends a Vote FOR Each of the Proposed Nominees Listed Above for Election to the Board of Directors.

 

The following information describes the offices held, other business directorships and the class and term of each director whose term continues beyond the 2011 Annual Meeting and who is not subject to election this year.

 

Beneficial ownership of equity securities for these directors is described in “Security Ownership of Management” on page 27.

 

Class III — Directors Whose Term Expires in 2012

 

Class II — Directors Whose Term Expires in 2013

 

 

As discussed above, on February 24, 2011 General (Ret.) Shalikashvili notified the Company that he intends to retire on the date of the Company’s Annual Meeting and, accordingly, will not stand for

re-election as a Class I director to the Company’s Board of Directors. General (Ret.) Shalikashvili, age 74, served as a Director of the Company since August 1998. He was the senior officer of the United States military and principal military advisor to the President of the United States, the Secretary of Defense and the National Security Council when he served as the thirteenth Chairman of the Joint Chiefs of Staff, Department of Defense, for two terms from 1993 to 1997. Prior to his tenure as Chairman of the Joint Chiefs of Staff, he served as the Commander in Chief of all United States forces in Europe and as NATO’s tenth Supreme Allied Commander, Europe (SACEUR). He has also served in a variety of command and staff positions in the continental United States, Alaska, Belgium, Germany, Italy, Korea, Iraq, Turkey and Vietnam.

 

When considering the specific experience, qualifications, attributes and skills that led the Board of Directors to conclude that General (Ret.) Shalikashvili should serve on the Board of Directors, the Board of Directors considered General (Ret.) Shalikashvili’s distinguished career as the Chairman of the Joint Chiefs of Staff, Department of Defense and as NATO’s SACEUR as well as his valuable contributions to L-3’s success during his many years of Board service.

 

For a discussion of the specific experience, qualifications, attributes and skills that led the Board of Directors to conclude that each of the Company’s continuing directors and its nominee for director, H. Hugh Shelton, should serve on the Board of Directors, see “The Board of Directors and Certain Governance Matters — Board of Directors Composition” beginning on page 15.

 

The Audit Committee of the Board of Directors has selected PricewaterhouseCoopers LLP to act as our independent registered public accounting firm for the fiscal year ending December 31, 2011, and a proposal to ratify this selection will be submitted to the stockholders at the Annual Meeting. PricewaterhouseCoopers LLP has acted as our independent registered public accounting firm since our formation in 1997, and the Audit Committee and the Board of Directors believe it is desirable and in our best interests to continue to retain that firm. Representatives of PricewaterhouseCoopers LLP will be present at the Annual Meeting. Such representatives will have the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions.

 

Although ratification is not required by our Amended and Restated Bylaws (the “Amended and Restated Bylaws”) or otherwise, the Board of Directors is submitting the selection of PricewaterhouseCoopers LLP to our stockholders for ratification because we value our stockholders’ views on the Company’s independent registered public accounting firm. If the foregoing proposal is not approved by the holders of a majority of the shares represented at the Annual Meeting, it will be considered as notice to the Board of Directors and the Audit Committee to consider the selection of a different firm. Even if the selection is ratified, the Audit Committee in its discretion may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and our stockholders.

 

The Board of Directors Recommends a Vote FOR Ratification of the Appointment of PricewaterhouseCoopers LLP as our Independent Registered Public Accounting Firm.

 

We are asking our stockholders to provide advisory approval of the compensation of our named executive officers as disclosed on pages 28-66 of this proxy statement. In connection with this vote, stockholders may also wish to consider the discussion regarding the “Compensation Committee” beginning on page 17. While the results of this vote are advisory, and not binding on our Company, our Compensation Committee intends to carefully consider the results of this vote when making future compensation decisions. The following is a summary of key points that stockholders may wish to consider in connection with their voting decision.

 

Our compensation program places a strong emphasis on performance-based variable pay to ensure a high pay-for-performance culture. In 2010, 90% of our Chief Executive Officer’s total direct compensation was in the form of performance-based annual and long-term incentives. This includes 28% of compensation in the form of stock options that have value only based on future increases in our stock price, and 21% in the form of performance units that will be forfeited unless our company’s performance during fiscal 2010-2012 meets pre-established goals for growing earnings per share (EPS) and for achieving favorable total stockholder returns (TSR) when compared to other companies within the S&P 1500 Aerospace & Defense Index.

 

Our performance targets are meaningful and rigorous, and are designed to encourage our executives to perform at the highest levels. For example, our minimum EPS performance target for the 2010-2012 period is based on the mid-point of our January 2010 published financial guidance of 6% annual growth. If we fail to achieve compound annual EPS growth of at least 6% for the 2010-2012 period, our executives will forfeit all of their EPS performance units. In order for executives to receive the target value for these awards, we must grow EPS at a compound annual rate of at least 8%, or approximately two percentage points higher than the mid-point growth rate reflected in our guidance.

 

Our compensation program reflects sound pay practices. In addition to the practices described above, our compensation program reflects the following:

 

 

We believe that the information disclosed in this proxy statement demonstrates that our executive compensation program is well-designed and is working as intended. In accordance with the requirements of Section 14A of the Securities Exchange Act of 1934 (which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)) and the related rules of the SEC, we are submitting for stockholder consideration the following resolution to approve, in a non-binding, advisory vote, the compensation of our named executive officers as disclosed on pages 28-66 of this proxy statement:

 

“RESOLVED, that the compensation paid to the company’s named executive officers, as disclosed in this proxy statement pursuant to the rules of the SEC, including the Compensation Discussion and Analysis, compensation tables and any related narrative discussion is hereby APPROVED.”

 

The Board of Directors Recommends a Vote FOR Approval of the Compensation Paid to Our Named Executive Officers.

 

In accordance with the requirements of Section 14A of the Securities Exchange Act of 1934 (which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act) and the related rules of the SEC, we are submitting for stockholder consideration a separate resolution to determine, in a non-binding advisory vote, whether a stockholder vote to approve the compensation paid to our named executive officers (that is, votes similar to the non-binding, advisory vote in Proposal 3 on page 11) should occur every one, two or three years. While the results of the vote are non-binding and advisory in nature, the Board intends to carefully consider the results of this vote.

 

After careful consideration of this proposal, our Board of Directors has determined that an advisory vote on executive compensation that occurs every year is the most appropriate policy for L-3 at this time, and, therefore, our Board of Directors recommends that you vote for future advisory votes on executive compensation to occur each year.

 

In formulating its recommendation, our Board of Directors recognized that the Company’s executive compensation programs are designed to promote a long-term connection between pay and performance. However, because executive compensation disclosures are made annually, the Board of Directors considered that an annual advisory vote on executive compensation will allow our stockholders to provide us with their direct input on our compensation philosophy, policies and practices as disclosed in the proxy statement every year. Additionally, an annual advisory vote on executive compensation is consistent with our policy of seeking input from, and engaging in discussions with, our stockholders on corporate governance matters and our executive compensation philosophy, policies and practices. We understand that our stockholders may have different views as to what is the best approach for L-3, and we look forward to hearing from our stockholders on this proposal.

 

The Board of Directors Recommends that You Vote “ONE YEAR” With Respect To The Frequency With Which Stockholders Are Provided An Advisory Vote on the Compensation Paid to Our Named Executive Officers.

 

Our Board of Directors directs the management of our business and affairs, as provided by Delaware law, and conducts its business through meetings of the Board of Directors and four standing committees: the Executive, Audit, Nominating/Corporate Governance and Compensation Committees. In addition, from time to time, special committees may be established under the direction of the Board of Directors when necessary to address specific issues.

 

Leadership Structure

 

The Board of Directors determined that combining the Chief Executive Officer and Chairman positions is the appropriate leadership structure for L-3 at this time. The Board of Directors believes that “one-size” does not fit all, and the decision of whether to combine or separate the positions of Chief Executive Officer and Chairman will vary company to company and depend upon a company’s particular circumstances at a given point in time. Accordingly, the Board of Directors carefully considers from time to time whether the Chief Executive Officer and Chairman positions should be combined based on what the Board of Directors believes is best for the Company and its stockholders.

 

Board structures vary greatly among U.S. public corporations, with over 60% of S&P 500 companies combining the positions of Chief Executive Officer and Chairman and only 19% of the S&P 500 having an independent chairman, according to a recent survey. The Board of Directors does not believe that the evidence demonstrates that any one leadership structure is more effective at creating long-term stockholder value. The Board of Directors believes that an effective leadership structure could be achieved either by combining or separating the Chief Executive Officer and Chairman positions, if the structure encourages the free and open dialogue of competing views and provides for strong checks and balances. Specifically, an effective governance structure must balance the powers of the Chief Executive Officer and the independent directors and ensure that the independent directors are fully informed, able to discuss and debate the issues that they deem important, and able to provide effective oversight of management.

 

The Board of Directors believes that if the positions of Chief Executive Officer and Chairman are combined, then appointing a lead independent director is necessary for effective governance. Accordingly, the Company’s Corporate Governance Guidelines provide that, in the event the Chief Executive Officer and Chairman positions are combined, the independent members of the Board of Directors will elect a “Lead Independent Director.” In addition to presiding at executive sessions of the independent directors, the responsibilities of the Lead Independent Director, which are clearly set forth in the Company’s Corporate Governance Guidelines, also include:

 

 

The Board of Directors believes that the responsibilities delegated to the Lead Independent Director are substantially similar to many of the functions typically fulfilled by a board chairman. The Board of Directors believes that its Lead Independent Director position balances the need for effective and independent oversight of management with the need for strong, unified leadership. The Board of Directors believes that one of the key elements of effective, independent oversight is that the independent directors meet in executive session on a regular basis without the presence of management. Accordingly, in 2010, the independent directors met in executive session four times with the Lead Independent Director presiding at such meetings.

L-3’s approach regarding its leadership structure has varied depending on what was best for L-3 at a particular point in time. Frank C. Lanza, one of L-3’s founders, served as Chairman and CEO from the time of L-3’s formation in 1997 until his death in 2006. Following his death, the Board of Directors promoted Michael T. Strianese, then L-3’s Chief Financial Officer, to the CEO position but also chose to appoint Robert B. Millard, one of its independent directors, as Chairman. In 2008, the Board of Directors decided to again combine the Chairman and CEO positions, and the independent directors appointed Mr. Millard as the Lead Independent Director. The Board of Directors believes that its current structure is in the best interest of L-3 at this time as it allows for a balance of power between the CEO and the independent directors and provides an environment in which its independent directors are fully informed, have significant input into the content of Board meeting agendas and are able to provide objective and thoughtful oversight of management. The Board also believes that L-3’s current leadership structure does not affect the Board’s role in risk oversight of the Company. In addition, The Board of Directors also believes that combining the roles of Chairman and CEO gives L-3 the best chance to continue on its path of outstanding performance over the long term. With slower growth in the U.S. Department of Defense budget, it has become more important than ever for L-3 to seek out business opportunities in the international community. In L-3’s industry, the Board of Directors believes that access to decision-makers in foreign countries is made easier when the roles of Chairman and CEO are combined as their customs often times dictate having comparable titles when conducting negotiations. Moreover, since most of L-3’s industry peers have combined the roles of chairman and CEO, L-3 believes that separating such roles would put us at a significant competitive disadvantage.

 

Independence

 

The Board of Directors has affirmatively determined that all of the directors, other than Mr. Strianese, including those who serve on the Audit, Nominating/Corporate Governance and Compensation Committees of the Board of Directors, have no material relationship with us, either directly or as a partner, stockholder or officer of an organization that has a relationship with us. Therefore, all of our directors, other than Mr. Strianese, are “independent” under all applicable standards. In connection with its determination that Mr. Millard and Professor Canizares are independent directors, the Board of Directors considered the fact that we conducted business with MIT where Mr. Millard is a trustee and Professor Canizares is employed as a full time professor. In addition, the Board of Directors considered the fact that we conducted business with NASA where Professor Canizares is a principal investigator of NASA’s Chandra X-ray observatory and is Associate Director of its science center. During 2010, we retained MIT to provide research and development on our behalf, and MIT and NASA purchased equipment from us. Payments made to, or received from, MIT or NASA were less than 1% of MIT’s, NASA’s or L-3’s annual consolidated gross revenues during each of their last completed fiscal years. Mr. Millard and Professor Canizares did not have any interest in these transactions and Professor Canizares recused himself from all decisions regarding L-3 with respect to these transactions.

 

Messrs Corcoran and White and General (Ret.) Shalikashvili serve as directors, trustees or in similar capacities (but not as executive officers or employees) for one or more non-profit organizations to which we have made charitable contributions. Contributions to these organizations were less than the greater of $1,000,000 or 1% of each of those organizations’ annual consolidated gross revenues during their last completed fiscal years and were below the thresholds set forth under our categorical standards of director independence.

 

In addition, the Board of Directors has determined that Professor Canizares and Messrs. Corcoran, Kramer and Simon, members of the Audit Committee, are “independent” for purposes of Rule 10A-3 under the Securities Exchange Act of 1934, as amended (“the Exchange Act”).

 

The Board of Directors has adopted Corporate Governance Guidelines that meet the independence standards of the NYSE. Also, as part of our Corporate Governance Guidelines, the Board of Directors has adopted categorical standards to assist it in evaluating the independence of

each of its directors. The categorical standards, which are included in our Corporate Governance Guidelines, are intended to assist the Board of Directors in determining whether or not certain relationships between our directors and us, either directly or as a partner, stockholder or officer of an organization that has a relationship with us, are “material relationships” for purposes of the NYSE independence standards. The categorical standards establish thresholds at which such relationships are deemed not to be material. Our Corporate Governance Guidelines, which include our categorical standards of independence, can be obtained through our website at: http://www.L-3com.com.

 

Directors are expected to attend board meetings and meetings of the committees on which they serve, to spend the time needed, and to meet as frequently as necessary, in order to properly discharge their responsibilities. In addition, to the extent reasonably practicable, directors are expected to attend stockholder meetings. During the fiscal year ended December 31, 2010, the Board of Directors held nine meetings. Each director attended at least 75% of the combined number of meetings of the Board of Directors and meetings of committees on which he served during the period in 2010 in which he served as a director. All of our current directors attended our annual stockholders meeting in April 2010. In accordance with applicable NYSE listing requirements, our independent directors hold regular executive sessions at which management, including the Chairman, President and Chief Executive Officer, is not present. Mr. Millard, our Lead Independent Director of the Board of Directors, presides at the regularly held executive sessions of the independent directors.

 

Board of Directors Composition

 

The Board of Directors seeks to ensure that the Board is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow the Board of Directors to satisfy its oversight responsibilities effectively. In that regard, the Nominating/Corporate Governance Committee is responsible for recommending candidates for all directorships to be filled by the Board of Directors or by the stockholders at an annual or special meeting. In identifying candidates for membership on the Board of Directors, the Nominating/Corporate Governance Committee takes into account (1) minimum individual qualifications, such as strength of character, mature judgment, industry knowledge or experience and an ability to work collegially with the other members of the Board of Directors and (2) all other factors it considers appropriate. In addition, although the Board of Directors does not have a policy with regard to the consideration of diversity in identifying director nominees, among the many factors that the Nominating/Corporate Governance Committee carefully considers, are the benefits to the Company of diversity, including gender and racial diversity, in board composition.

 

After conducting an initial evaluation of a candidate, the Nominating/Corporate Governance Committee will interview that candidate if it believes the candidate might be suitable to be a director and may also ask the candidate to meet with other directors and management. If the Nominating/Corporate Governance Committee believes a candidate would be a valuable addition to the Board of Directors, it will recommend to the full Board of Directors that candidate’s election.

 

As part of its recurring activities, the Nominating/Corporate Governance Committee seeks to identify qualified candidates to sit on the Board of Directors. In the case of the nomination of General (Ret.) Shelton, General (Ret.) Shelton was recommended by Robert RisCassi. Mr. RisCassi was a Senior Vice President of L-3, until he retired in 2009, and now serves as a consultant to the Company. Mr. RisCassi advised Mr. Strianese, the Chairman, President and Chief Executive Officer, that he believed that General (Ret.) Shelton would be a valuable addition to L-3’s Board and that he should be one of the candidates considered by the Nominating/Corporate Governance Committee to fill a vacancy should a vacancy arise. Mr. Strianese then submitted Mr. RisCassi’s recommendation to the Nominating/Corporate Governance Committee for its review and consideration. The Nominating/Corporate Governance Committee Chairman, as well as several members of the Board of Directors, met with General (Ret.) Shelton to consider whether he would be an appropriate candidate for L-3’s Board of Directors. On March 4, 2011, the Nominating/Corporate Governance Committee met to consider General (Ret.) Shelton’s candidacy. At that meeting, they voted unanimously to recommend

General (Ret.) Shelton to the Board of Directors as a nominee for election as a director at the Annual Meeting. Following that recommendation, the Board of Directors unanimously agreed to recommend to stockholders General (Ret.) Shelton as a Class I nominee for election to the Board of Directors for a three-year term expiring in 2014.

 

When considering whether the Board’s directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of L-3’s business and structure, the Board of Directors focused primarily on the information discussed in each of the Board members’ or nominees’ biographical information set forth on pages 5-9. In particular,

 

 

In addition, in connection with the nominations of Messrs. Strianese and White for election as directors at the 2011 Annual Meeting, the Board of Directors considered their valuable contributions to L-3’s success during their many years of Board service.

Audit Committee

 

The current members of the Audit Committee are:  Claude R. Canizares, Thomas A. Corcoran (chair), Lewis Kramer and Arthur L. Simon. The Audit Committee met 14 times in 2010. The Audit Committee is generally responsible for, among other things:

 

 

L-3’s Audit Committee Charter states that the Audit Committee shall consist of at least three members, all of whom are determined by the Board of Directors to meet the independence, financial literacy and expertise requirements of the SEC and NYSE. These requirements dictate that all Audit Committee members must be financially literate and at least one member of the Audit Committee shall be an “audit committee financial expert” in compliance with the criteria established by the SEC and NYSE. The Board of Directors has determined that all of the members of the Audit Committee are financially literate and meet the independence requirements mandated by the NYSE listing standards, Rule 10A-3 under the Exchange Act and our independence standards. In addition, the Board of Directors has determined that Mr. Simon and Mr. Kramer are both “audit committee financial experts,” as defined by Item 407(d)(5) of Regulation S-K.

 

Compensation Committee

 

The current members of the Compensation Committee are:  Robert B. Millard (chair), Lewis Kramer, John M. Shalikashvili, Alan H. Washkowitz and John P. White. The Compensation Committee, which had five meetings in 2010, is responsible for, among other functions:

 

 

 

In fulfilling its responsibilities, the Compensation Committee can delegate any or all of its responsibilities to a subcommittee of the committee. For a discussion concerning the processes and procedures for determining executive and director compensation and the role of executive officers and compensation consultants in determining or recommending the amount or form of compensation, see “Compensation Discussion and Analysis” beginning on page 28 and “Compensation of Directors” beginning on page 67.

 

The Board of Directors has determined that all of the members of the Compensation Committee meet our standards for independence and the independence requirements mandated by the NYSE listing standards. In addition, all members of the Compensation Committee qualify as “non-employee directors” for purposes of Rule 16b-3 under the Exchange Act and “outside directors” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). For more of a discussion concerning Section 162(m), see “Compensation Discussion and Analysis — Other Factors Affecting Compensation” beginning on page 46.

 

Use of Consultants

 

As set forth in its charter, the Compensation Committee has the authority to select, retain and/or replace, as needed, outside consultants to provide advice to the Compensation Committee in connection with its fulfillment of its responsibilities. Since 2004, the Compensation Committee has retained Mercer (US) Inc. (“Mercer”), a wholly-owned subsidiary of Marsh & McLennan Companies, Inc. (“MMC”), to provide information, analyses and advice regarding executive and director compensation. In 2010, the Compensation Committee requested that Mercer advise it directly on a variety of compensation-related matters, including:

 

 

 

In the course of conducting its activities, Mercer attended all meetings of the Compensation Committee and presented its findings and recommendations to the Compensation Committee for discussion. During the course of the year, Mercer met with management to obtain and validate data, and review materials. In 2010, the Company paid Mercer approximately $195,000 for all services rendered to the Compensation Committee. Mercer also attended select Board of Directors meetings at which the Compensation Committee reviewed the executive compensation program with the Board of Directors, and met with the Chair of the Compensation Committee to review meeting agenda items and the scope of Mercer’s work.

 

L-3 and its affiliates also separately retain Mercer and other affiliates of MMC to provide services that are unrelated to the Compensation Committee services (the “Unrelated Company Services”). In 2010, the Company paid Mercer and its affiliates an aggregate of approximately $415,000 for these Unrelated Company Services. The Unrelated Company Services included: data recovery, collection and investigation services; brokerage services relating to insurance policies and surety bonds; actuarial valuation services for workers compensation and pension plan liabilities; and non-executive compensation consulting services. Separately in 2010, Seabury & Smith, Inc., an affiliate of MMC, acted as an insurance and services broker with respect to a number of insurance products, such as group universal life, home and auto insurance and legal services plans, that were offered to L-3’s U.S.-based employees and could be purchased through employee-directed payroll deductions.

 

The decisions to engage Mercer and its affiliates for Unrelated Company Services in 2010 were made by employees of the Company or its affiliates and were subsequently ratified by the Compensation Committee. Mercer has advised the Compensation Committee that none of its principals or employees who provided advice to the Compensation Committee had any direct or indirect involvement in providing these Unrelated Company Services, or in the Company’s selection of, or negotiation of arrangements with, Mercer or its affiliates to provide such services. In addition, none of Mercer’s principals or employees who provided advice to the Compensation Committee received any direct or indirect compensation as a result of Unrelated Company Services, other than to the extent that employees of Mercer benefit from the overall success of MMC and its affiliates generally. The Compensation Committee does not believe that Mercer’s ability to provide it with objective advice was impaired by the Unrelated Company Services provided to the Company and its affiliates.

 

Management retains its own outside compensation consultant, Towers Watson & Co., to provide the Company with non-executive compensation consulting services and advise management from time to time with regard to senior executive compensation programs.

 

Nominating/Corporate Governance Committee

 

The Nominating/Corporate Governance Committee currently consists of Messrs. Simon, Washkowitz (Chairman) and White and General (Ret.) Shalikashvili. The Board of Directors expects that, if elected, General (Ret.) Shelton will serve as a member of the Nominating/Corporate Governance Committee. This committee, which met four times during 2010, monitors corporate governance policies and procedures and serves as the Nominating Committee for the Board of Directors.

 

The primary functions performed by this committee include, among other responsibilities:

 

 

 

The Nominating/Corporate Governance Committee will consider candidates for nomination as a director recommended by stockholders, directors, officers, third party search firms and other sources. The Nominating/Corporate Governance Committee will review all candidates for director in the same manner, regardless of the source of the recommendation. Individuals recommended by stockholders for nomination as a director will be considered in accordance with the procedures described under Stockholder Proposals and Nominations on page 22 of this proxy statement.

 

The Board of Directors has determined that all of the members of the Nominating/Corporate Governance Committee meet the independence requirements mandated by the applicable NYSE listing standards applicable to serving on the Nominating/Corporate Governance Committee and our standards of independence.

 

Executive Committee

 

The Executive Committee currently consists of Messrs. Corcoran, Millard (Chairman), and Strianese. The Executive Committee did not meet during 2010. The Executive Committee may exercise most board powers during periods between board meetings.

 

Oversight of Risk Management

 

L-3 is exposed to various risks including, but not limited to, strategic, operational, financial, liquidity, reputational, and also risks relating to reporting, pending and threatened litigation, regulatory and legal compliance. L-3’s enterprise risk profile is also affected by changes in the yearly levels and priorities of its end customers, including the U.S. Department of Defense. L-3’s management designed the Company’s enterprise risk management process to identify, monitor and evaluate these risks, and develop an approach to address each identified risk. L-3’s enterprise risk management process is a company-wide initiative and involves each of our operating segments and business units. The Company takes a multi-disciplinary approach to risk.

 

L-3’s Chief Financial Officer, at the direction of the Chief Executive Officer, is responsible for overseeing the Company’s enterprise risk management process and periodically reports enterprise risk information to each of the Chief Executive Officer, the Audit Committee and the Board of Directors. In fulfilling his risk management responsibilities, the Chief Financial Officer works closely with members of the senior management team, including the Company’s General Counsel, the Executive Vice President of Corporate Strategy and Development, the Controller and Principal Accounting Officer, the Vice President — Planning, the Vice President of Internal Audit and Corporate Ethics Officer, and each of the business unit group presidents and group chief financial officers.

 

On behalf of the Board of Directors, the Audit Committee plays a key role in the oversight of the Company’s enterprise risk management function. In this regard, the Audit Committee discusses policies with respect to risk assessment and risk management, and the Company’s Chief Financial Officer meets with the Audit Committee at least five times per year to specifically discuss the enterprise risks facing the Company, highlighting any new risks that may have arisen since they last met. Additionally, at each Board of Directors meeting, the Chief Executive Officer and Chief Financial Officer report

information about major risks facing the company. Finally, the Chief Financial Officer reports directly to the Board of Directors at least once per year to apprise it directly of the Company’s enterprise risk management process.

 

Committee Charters and Corporate Governance Guidelines

 

The Board of Directors has adopted a charter for each of the Audit, Nominating/Corporate Governance and Compensation Committees and corporate governance guidelines that address the make-up and functioning of the Board of Directors. You can find links to these materials on our website at: http://www.L-3com.com under the “Investor Relations” tab by selecting “Corporate Governance.”

 

Code of Ethics and Business Conduct

 

The Board of Directors has adopted a code of ethics and business conduct that applies to all of our directors, officers and employees. You can find a link to such code on our website at: http://www.L-3com.com. In accordance with, and to the extent required by, the rules and regulations of the SEC, we intend to post on our Web site waivers or implicit waivers (as such terms are defined in Item 5.05 of Form 8-K of the Exchange Act) and amendments of the code of ethics and business conduct that apply to any of our directors and executive officers, including our Chairman, President and Chief Executive Officer, Senior Vice President and Chief Financial Officer, and Vice President, Controller and Principal Accounting Officer or other persons performing similar functions.

 

Communications with Directors

 

Anyone who would like to communicate with, or otherwise make his or her concerns known directly to, the full Board of Directors, the chair of any of the Executive, Audit, Nominating/Corporate Governance and Compensation Committees, to the non-management directors as a group or to the Lead Independent Director of the Board of Directors, may do so either by email that can be accessed through our website at http://www.L-3com.com or by addressing such communications or concerns to the Corporate Secretary of L-3 Communications Holdings, Inc., 600 Third Avenue, New York, New York 10016, who will forward such communications to the appropriate party. The addressed communications may be done confidentially or anonymously. The Corporate Secretary or Assistant Secretary will forward all correspondence to the Board of Directors or the specifically designated party, except for spam, junk mail, mass mailings, product complaints or inquiries, job inquiries, surveys, business solicitations or advertisements or patently offensive or otherwise inappropriate material.

 

Under the SEC’s rules and regulations, any stockholder desiring to submit a proposal to be included in our 2012 proxy statement must submit such proposal to us at our principal executive offices located at: 600 Third Avenue, New York, New York 10016, to the attention of the Corporate Secretary, no later than the close of business on November 15, 2011. Under Rule 14a-8 under the Exchange Act, a stockholder submitting a proposal to be included in the Company’s proxy statement is required to be a record or beneficial owner of at least 1% or $2,000 in market value of the Common Stock and to have held such Common Stock continuously for at least one year prior to the date of submission of the proposal, and he or she must continue to own such securities through the date on which the meeting is held.

 

The Amended and Restated Bylaws provide for advance notice provisions. The Amended and Restated Bylaws require the timely notice of certain information to be provided by any stockholder who proposes director nominations or any other business for consideration at a stockholders’ meeting. Failure to deliver a proposal in accordance with the procedures discussed below and in the Amended and Restated Bylaws may result in the proposal not being deemed timely received. To be timely, notice of a director nomination or any other business for consideration at a stockholders’ meeting must be received by our Corporate Secretary at our principal executive offices no less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting. Therefore, to be presented at the Company’s 2012 Annual Meeting, such a proposal must be received by the Corporate Secretary on or after December 28, 2011 but no later than January 27, 2012. In the event that the date of the 2012 Annual Meeting is advanced by more than 20 days, or delayed by more than 70 days, from the anniversary date of the 2011 Annual Meeting, notice must be received not earlier than 120 days prior to such Annual Meeting and not later than the close of business on the later of the 90th day prior to such Annual Meeting or the 10th day following the day on which public announcement of the date of the 2012 Annual Meeting is first made. All proposals must be sent to our principal executive offices by certified mail, return receipt requested, to the attention of the Corporate Secretary, L-3 Communications Holdings, Inc., 600 Third Avenue, New York, New York 10016.

 

Stockholders may, subject to and in accordance with the Amended and Restated Bylaws, recommend director candidates for consideration by the Nominating/Corporate Governance Committee. The Amended and Restated Bylaws contain certain informational and other requirements that must be followed in connection with submitting director nominations and any other business for consideration at a stockholders’ meeting. The Amended and Restated Bylaws are posted on our website at http://www.L-3com.com

 

The notice must be delivered to the Corporate Secretary, who will forward the notice to the Nominating/Corporate Governance Committee for consideration.

 

Set forth below is certain information regarding each of our current executives, other than Mr. Strianese who is presented under “Class I — Directors Whose Term Expires in 2014”, and certain of our other officers.

 

 

We know of no person who beneficially owned more than five percent of the Common Stock, except as set forth below.

 

 

 

 

As of March 1, 2011, the Record Date, there were 108,090,470 shares of our Common Stock outstanding. The following table shows the amount of Common Stock beneficially owned (unless otherwise indicated) by our named executive officers, our directors and our director nominee, and by all of our current executive officers and directors as a group.

 

Except as otherwise indicated, all information listed below is as of March 1, 2011.

 

 

 

 

This Compensation Discussion and Analysis describes L-3’s executive compensation program for the year ended December 31, 2010, our 2010 fiscal year. We use this program to attract, motivate, and retain the senior executives responsible for driving our success. In particular, this Compensation Discussion and Analysis explains how the Compensation Committee (the “Committee”) of the Board of Directors made its compensation decisions for our named executive officers for whom compensation is disclosed in the compensation tables included in the Tabular Executive Compensation Disclosure section of this proxy statement beginning on page 49. The named executive officers for the 2010 fiscal year are:

 

 

2010 Operating Environment and Company Achievements

 

Like most of the United States (“U.S.”) defense industry, we have benefited from the upward trend in U.S. Department of Defense (“DoD”) budget authorization and spending outlays since 2001, including wartime spending supplemental funding for U.S. Overseas Contingency Operations in Iraq and Afghanistan. While we believe the U.S. Government will continue to place a high priority on national security, we anticipate that future DoD base budgets will grow at a slower rate compared to the recent past and flatten or modestly decline in select areas. We also expect that future Overseas Contingency Operations supplemental appropriations will decline. Mounting pressure for deficit reduction and reduced national spending has created an environment where national security spending will also be closely examined and possibly reduced. The current and future DoD base budgets and Overseas Contingency Operations supplemental appropriations are a function of several factors beyond our control, including, but not limited to, changes in U.S. procurement policies, budget considerations, current and future economic conditions, presidential administration priorities, changing national security and defense requirements, the level of U.S. military forces committed to Overseas Contingency Operations and geo-political developments.

 

Despite this more challenging environment, L-3 delivered strong financial results in 2010. For the year ended December 31, 2010, consolidated operating income increased by $94 million, or 6%, to $1,750 million, while diluted earnings per share increased by $0.64, or 8%, to $8.25. In addition, L-3 generated $1,461 million of cash from operating activities for the year ended December 31, 2010, an increase of $54 million, or 4%, compared to the year ended December 31, 2009.

 

L-3 continued its disciplined approach to returning cash to our shareholders in 2010, including $834 million in share repurchases and $184 million in dividends. In addition, L-3 refinanced $800 million of senior subordinated notes, improving the Company’s debt maturity profile. In light of L-3’s solid balance sheet and strong cash flow generation, the Board increased L-3’s quarterly dividend payment per share by 13%, from $0.40 to $0.45 in February 2011, which represented the seventh consecutive annual increase.

 

Compensation Highlights

 

The following highlights the Committee’s key compensation decisions discussed in more detail below.

 

 

 

The Committee’s decisions above took into account L-3’s continued strong financial and operational performance in a challenging economic environment. Ultimately, the Committee reviewed L-3’s 2010 performance relative to 2009, and concluded that, while its 2010 performance was above expectations, it did not meet the level of L-3’s 2009 achievements.

 

As described below in “Assessment of Company Performance for 2010-2011 Compensation Decisions,” the Company’s 2010 fiscal-year performance was considered by the Committee not only in determining the annual incentives paid to the named executive officers in February 2011, but also as a factor in determining the long-term incentives awarded in February 2011. Accordingly, total direct compensation for the Chief Executive Officer based on the Company’s 2010 fiscal-year performance (i.e., 2010 base salary together with the annual and long-term incentives awarded in February 2011) was $13.15 million, reflecting a decrease of $350,000, or 2.6%, from his total direct compensation based on the prior fiscal-year’s performance (i.e., 2009 base salary together with the annual and long-term incentives awarded in February 2010). The Committee believes that this result is appropriate based on 2010 performance, competitive market data and the Company’s target compensation philosophy.

 

The Summary Compensation Table on page 49 discloses compensation information in the format required by the SEC. In the Summary Compensation Table, the stock awards and option awards columns for 2010 report the grant date fair value of the awards made in 2010 (i.e., awards that were based in part on 2009 fiscal-year performance) and do not include the awards made in February 2011 as described above. Accordingly, total direct compensation for the Chief Executive Officer as reported in the Summary Compensation Table for 2010 (i.e., the Salary, Bonus, Stock Awards and Option Awards columns for 2010) increased slightly over 2009 primarily as a result of the long-term incentives awarded at the beginning of 2010 in February. The total compensation amounts reported in the table for 2010 also include significant increases in pension values resulting from changes in actuarial assumptions. For a further discussion, see “— Other Pay Elements — Retirement Benefits” beginning on page 44 and Note 5 to the Summary Compensation Table.

Oversight of L-3’s Executive Compensation Practices

 

L-3’s executive compensation program is administered by the Committee. The Committee is responsible for, among other functions, reviewing and approving compensation for the named executive officers. See “The Board of Directors and Certain Governance Matters — Compensation Committee” beginning on page 17 for further details regarding the duties and responsibilities of the Committee.

 

Pursuant to its charter, the Committee has the sole authority to select and/or retain outside counsel, compensation and benefits consultants, or any other advisors to provide it with advice and assistance in connection with fulfilling its responsibilities. As described more fully below, in determining executive compensation, the Committee reviews all components of the named executive officers’ compensation and takes into account a number of variables, including the extensive compensation and other data distributed to the Committee and the advice of Mercer, an outside consulting firm that was retained by, and reports directly to, the Committee. Mercer assists the Committee in connection with the Committee’s evaluation of L-3’s executive compensation program. Mercer also currently advises the Committee on a variety of issues, including compensation strategy, market benchmarking, executive pay trends and developments and the review of L-3’s incentive compensation plans and potential design modifications. See “The Board of Directors and Certain Governance Matters — Compensation Committee — Use of Consultants” beginning on page 18.

 

Objectives of Executive Compensation Program

 

L-3 is one of the largest aerospace and defense contractors in the United States. Our executive compensation program is designed to support L-3’s mission to maximize stockholder value. The specific objectives of our executive compensation program include the following:

 

 

To achieve these specific objectives, the executive compensation program is guided by the following core principles:

 

 

Risk Management and Compensation

 

The Committee believes that the design of the Company’s compensation program should emphasize performance-based variable pay while discouraging inappropriate or excessive risk-taking. Accordingly, the Committee designed the Company’s executive compensation program to balance variable pay incentives based on short-term, intermediate-term and long-term performance and include multiple performance metrics, such as relative total stockholder return and growth in diluted earnings per share. Short-term performance is addressed through our annual incentive program, while

intermediate-term and long-term performance is addressed through our long-term incentive program. The Committee’s assessment of short-term performance under our annual incentive program is based upon a wide variety of performance measures and is fully discretionary in order to ensure a balanced and flexible approach to compensating our executives for achieving our short-term objectives. Our long-term incentive program provides for awards whose ultimate value is directly dependent on our intermediate and long-term performance and uses overlapping performance periods designed to promote sustainable, long-term performance. Intermediate performance is rewarded through the use of performance units that include multi-year earnings per share and total stockholder return targets, while long-term performance is promoted through the use of stock options that vest in equal annual increments over a three-year period and whose maximum value is contingent on stock price appreciation over an up to ten-year exercise period.

 

The Committee has also adopted stock ownership guidelines for our senior executives, including our named executive officers, which are intended to align their long-term interests with those of our stockholders and to encourage a long-term focus in managing the Company. Under our stock ownership guidelines, executives are required to maintain an ownership interest in L-3’s Common Stock of 1 to 5 times their base salary, depending on their level of responsibilities. See “— Stock Ownership Guidelines” on page 46.

 

Program Overview

 

We use a variety of components in our executive compensation program. The following chart provides an overview of our principal compensation and benefits programs and why each of these particular elements is included.

 

 

Factors Considered When Setting Executive Compensation

 

When making pay determinations for the named executive officers, the Committee considers a variety of factors including, among others:

 

 

 

Ultimately, the Committee uses its discretion and business judgment when determining precisely how much to pay our named executive officers, taking into account the information it has been provided and the advice of Mercer. The Committee evaluates each named executive officer’s performance during the year based on L-3’s and the officer’s performance, their business units’ performance (as applicable), leadership qualities, business responsibilities and long-term potential to enhance stockholder value in a manner consistent with our code of ethics. The Committee reviews each component of each named executive officer’s compensation and takes into account the views of Mr. Strianese and Mercer when determining what base salary, annual incentive, long-term incentives and other benefits to give each executive. In evaluating performance, the Committee considers company-wide and individual performance objectives on a collective basis. The Committee does not use any pre-determined formula or weighting and no one performance objective was individually material to the Committee’s compensation determinations.

 

In developing the pay recommendations and resulting levels of compensation for each named executive officer, Mercer presents peer group pay practices, compensation survey data and general industry pay practices to the Committee and Mr. Strianese. Mr. Strianese develops pay recommendations for the other named executive officers that are discussed and approved by the Committee, with such changes as the Committee determines are appropriate. Mr. Strianese also provides the Committee with a written self-assessment that addresses financial, strategic, operational and personnel matters. The named executive officers other than Mr. Strianese do not participate in the setting of compensation for themselves or for any other named executive officer.

 

In setting compensation for the named executive officers, the Committee also considers the following:

 

 

When considering L-3’s compensation practices and levels, the Committee reviews the compensation practices and levels of a group of leading aerospace and defense companies (“peer group”) that meet one or more of the following criteria:

 

 

Mercer develops the peer group information for the Committee. In 2010, the Committee, based in part upon the recommendation of Mercer, determined to use the same peer group as it did in the prior two fiscal years. The 2010 peer group consists of the following fourteen companies:

 

 

The Committee also reviews competitive compensation levels prepared by Mercer using the most appropriate compensation surveys available, including surveys from Mercer, Hewitt Associates, Inc. and Towers Watson & Co. Compensation survey data provides information on pay levels for a broader group of companies than the peer group, across many industries. Companies included in the review of competitive compensation levels are selected based on revenue, as executive compensation levels typically are positively correlated with company size. Similar to prior years, in 2010, the Committee confirmed that L-3’s revenues for 2009 (i.e., the most recent completed fiscal year) approximated the median of the revenues of the companies included in the peer group for their most recent completed fiscal years.

 

Mercer provides the Committee with summary percentile statistics (that is, 25th, 50th and 75th percentiles) for the following components of compensation: base salary; annual incentives as a percentage of salary; total cash compensation (base salary plus annual incentives) on both a target and actual basis; long-term incentive awards expressed as a dollar value and as a percentage of salary; and total direct compensation (total cash compensation plus long-term incentive awards) on both a target and actual basis. In reviewing competitive compensation levels, the Committee, based in part on the recommendation of Mercer, considers peer group data for all named executive officers and, for those named executive officers who are group presidents (Messrs. Dunn and Kantor), also considers survey data because it believes that including a broader industry group more accurately reflects the labor market for these positions and ensures a meaningful sample size given the revenues of the groups they lead.

 

Assessment of Company Performance for 2010-2011 Compensation Decisions

 

As discussed above, L-3’s executive compensation package emphasizes performance-based annual and long-term incentive awards. As a result, a significant majority of the named executive officers’ compensation is dependent upon the performance of L-3, the named executive officer, and the businesses within his group, as applicable. The following table sets forth the actual allocation for 2010

among base salary, annual incentive awards and long-term incentive awards for L-3’s named executive officers (which allocation was generally consistent with the allocation in 2009):

 

 

 

 

The Committee feels that the allocation of pay elements shown above achieves an appropriate balance among short-term, intermediate-term and long-term compensation, as well as between fixed and variable compensation. The Committee believes that the greater weighting placed on performance-based compensation, especially long-term incentives, encourages an appropriate degree of risk-taking and aligns the named executive officers’ financial interests with those of our stockholders over the long-term.

 

As part of determining the 2010 annual incentive awards and, to a lesser degree, the long-term incentive awards granted in February 2011 for the named executive officers, the Committee considered, among other factors, the achievements discussed above under “2010 Operating Environment and Company Achievements” and assessed L-3’s financial performance against its business plan, and against its performance in 2009. The Committee also reviewed L-3’s performance as compared to the performance of all the companies in the peer group and as compared to the performance of four companies within the peer group that L-3 believes to represent the integrated defense companies it is most commonly compared to by analysts and investors for performance purposes (the “core defense group”). The companies composing the core defense group are General Dynamics Corporation, Lockheed Martin Corporation, Northrop Grumman Corporation and Raytheon Company. The Committee ultimately concluded that the Company’s overall 2010 financial performance was above expectations, but did not meet the level of the Company’s 2009 achievements.

 

 

As part of determining the long-term incentive awards granted in February 2010 for the named executive officers, the Committee considered, as one of the factors described in “2010 Long-Term Incentives” below, L-3’s 2009 financial performance. As disclosed in L-3’s 2010 proxy statement, the Committee performed an assessment of L-3’s 2009 financial performance as follows:

 

 

 

In connection with its review of the Company’s 2010 performance against L-3’s peers, the Committee considered that many of the peer companies, particularly those with significant portions of revenues derived from non-defense operations, experienced significant deteriorations in their business for 2009 due to downturns in global economic conditions, and experienced corresponding levels of disproportionate growth during 2010 as economic conditions returned to more normal levels. Accordingly, in assessing the Company’s overall performance achievements for 2010, the Committee placed greater weight on the Company’s absolute performance against the prior year and its business plan, as opposed to the Company’s relative performance against peers. In addition, as part of its periodic review of peer company practices and based in part on the advice of Mercer, the Committee determined that it would be appropriate to assign more significant weight to TSR as a long-term performance measure, rather than as a specific factor in determining annual incentive awards. In reaching this decision, the Committee observed that TSR performance significantly impacts the compensation and wealth of L-3 executives in connection with performance unit payouts, the value of stock options, the value of restricted stock awards and the value of other L-3 stock that may be held by the executive, including for compliance with L-3’s stock ownership guidelines, and that TSR is not used by any of the peer companies as an annual incentive performance measure.

 

2010 Base Salary

 

Base salary provides an executive with a steady income stream and is based upon his or her level of responsibility, experience, individual performance and contribution to our overall success. Competitive base salaries, in conjunction with other pay components, enable L-3 to attract and retain highly talented executives. The Committee typically sets base salaries for the named executive officers in the aggregate at approximately the 50th percentile of base salary levels. Individual base salaries, however, will vary in practice based upon an individual’s level of responsibility, prior experience and performance over time.

 

The Committee reviews salaries annually and, when appropriate, makes adjustments after considering peer group practices for similar positions and individual factors, such as competencies, skills, experience, performance and promotions. The Committee generally approves salary increases for senior executives during the first quarter of each year. These salary increases generally become effective in April of each year.

 

The Committee approved the following base salary adjustments for the named executive officers based on a number of factors, including the recommendation of Mr. Strianese with respect to the compensation of the other named executive officers and relevant market data.

 

 

 

Based on the salary increases set forth above, Mr. Strianese’s 2010 base salary was between the 50th and 75th percentiles for his position relative to competitive market data, while the 2010 base salaries for the other named executive officers, on average, were approximately at the 50th percentile for their positions relative to competitive market data.

 

2010 Annual Incentives

 

The Annual Incentive Plan provides all senior executives, including the named executive officers, with the opportunity to earn annual cash incentive awards based on the performance of L-3, their business units (as applicable) and the executive.

 

In February 2010, the Committee established an annual incentive award target range for Mr. Strianese of $0 million to $3 million plus, with $2 million for performance at expectation. The Committee also approved specific annual incentive award targets for each of the other named executive officers that were set between 80% and 100% of base salary for performance at expectation, with actual payout ranges of 0% to 200% of their specific targets based on the Committee’s assessment of their actual performance achievements. Mr. Strianese’s target range positioned his target total cash compensation at approximately the median for performance at expectation. The annual incentive award targets for the other named executive officers, on average, positioned target cash compensation at between the 50th and 75th percentiles for their positions relative to competitive market data for performance at expectation.

 

Annual incentives earned for 2010 were determined and paid in February 2011. In connection with determining the amounts for 2010 incentive awards for each named executive officer, the Committee considered:

 

 

 

 

 

For the assessment described in item 3 above, Mr. Strianese provided the Committee with a written assessment for each of the other named executive officers that addressed the executive’s performance, including with respect to the following categories:

 

 

Following the close of the 2010 fiscal year, the Committee, in consultation with the independent members of the Board of Directors, evaluated the performance of Mr. Strianese, taking into account, among other considerations, a written self-assessment of his accomplishments in 2010 with respect to financial, strategic, operational and personnel matters.

 

Based on these factors, the Committee approved the following 2010 annual incentives for the named executive officers:

 

 

 

 

In assessing the performance of the named executive officers who are corporate officers (Messrs. Strianese, D’Ambrosio and Brunson), the Committee evaluated their individual contributions for 2010 primarily in the context of the Committee’s overall assessment of the Company’s 2010 performance as described above in “Assessment of Company Performance for 2010-2011 Compensation Decisions.” With respect to Mr. Dunn, the Committee determined to award him an annual incentive that approaches the maximum of his applicable bonus range primarily based on the superior financial performance of the businesses within the Sensors & Simulation Group against their internal plans for 2010 that were established prior to the beginning of the fiscal year. Finally, with respect to Mr. Kantor, the Committee primarily considered his promotion to President of L-3 Services Group on June 1, 2010, the financial performance of the businesses within the Marine & Power Systems Group until June 1, 2010 (the date through which he served as Group President) and, to a

lesser extent, his initial leadership as President of L-3 Services Group for the remainder of the 2010 fiscal year.

 

For benchmarking purposes, the Committee also considered these awards in the context of the resulting 2010 total direct compensation levels (i.e., salary, annual incentive awards and grant date value of long-term incentives). Total direct compensation for Mr. Strianese was between the 50th and the 75th percentiles for his position relative to competitive market data. Total direct compensation for the other named executive officers, on average, was between the 25th and the 50th percentiles for their positions relative to competitive market data.

 

2010 Long-Term Incentives

 

Long-term incentives are intended to align the interests of the named executive officers and stockholders by linking a meaningful portion of executive pay to long-term stockholder value creation and financial success over a multi-year period. Long-term incentives are also provided to facilitate ownership of our Common Stock by the named executive officers and other senior executives.

 

In 2010, the Committee awarded long-term incentives to the named executive officers in the form of stock options, performance units and restricted stock units. Stock options are granted to reward executives for long-term stock price appreciation, performance units are granted to reward executives for intermediate-term results and restricted stock units are granted to enhance retention. The timing for grants of long-term incentive awards was changed beginning in 2010 from July to February of each year. The Committee made this change because it determined that it was more effective to make decisions with regard to long-term incentives at the same time as it determines base salary increases and annual incentive awards.

 

When granting long-term incentive awards, the Committee approves the grant date value for all award types, which is then allocated among stock options, performance units and restricted stock units based on a target mix described below. For purposes of converting grant date values to specific numbers of stock option, performance unit and restricted stock unit awards, stock options are valued based on the Black-Scholes valuation model used by L-3 to calculate the grant date fair value of stock option awards for financial reporting purposes, and performance units and restricted stock units are valued at the closing price of our Common Stock on the grant date.

 

In connection with determining the long-term incentive awards for each named executive officer, the Committee considered the following factors:

 

 

Based on these factors, the Committee approved the following 2010 long-term incentive awards for the named executive officers:

 

 

 

 

For benchmarking purposes, the Committee, based in part on the recommendation of Mercer, considers long-term incentive awards in the context of the resulting target total direct compensation levels (base salary, target annual incentives and the grant date value of long-term incentives). Based on the above awards, target total direct compensation for Mr. Strianese was approximately at the 50th percentile for his position relative to competitive market data, while target total direct compensation for the other named executive officers, on average, was approximately at the 50th percentile for their positions relative to competitive market data.

 

The Committee, based, in part, upon a market assessment conducted by Mercer, established the following target mix, to balance, in its judgment, the goals of stock price appreciation, intermediate-term results and executive retention:

 

 

The 2010 target mix did not change from 2009, as the Committee believes it remains effective to achieve these goals and is consistent with market practice.

 

For additional information concerning the specific numbers of stock options, performance units and restricted stock units awarded to the named executive officers as a result of the valuation methodologies and target mix described above, see the 2010 Grants of Plan-Based Awards table on page 51.

 

Stock Options.  Stock options are a regular component of our long-term incentive program. The Committee believes that stock options directly align the long-term interests of L-3’s executives with those of L-3’s stockholders because stock options provide value to executives only if the price of our

Common Stock increases after the stock options are granted. Stock option grants have the following characteristics:

 

 

Performance Units.  Performance units are a regular component of our long-term incentive program. The Committee believes that performance units promote the achievement of strong intermediate-term results. Each participant receives a target amount of performance units, with each unit having a value equivalent to one share of our Common Stock. The number of units ultimately earned can range from zero to 200% of the target amount of units based upon the level of performance achieved over the associated performance period in relation to pre-determined performance goals established by the Compensation Committee. Units issued under the program are payable either in cash (based on the closing price of our Common Stock at the end of the performance period) or are convertible on a one-for-one basis into shares of our Common Stock, in each case as determined at the time of grant by the Committee. Performance measures used under this program are intended to reinforce stockholder value creation. The measures the Committee selected for the 2010 performance units were relative total stockholder return (“TSR”) and growth in diluted earnings per share (“EPS”) during the three-year period beginning January 1, 2010 and ending December 31, 2012. Except as discussed in the next sentence, these measures (and their associated weightings described below) have remained unchanged since the introduction of performance units as a regular component of the long-term incentive program in 2007. In 2010, the performance period changed from 2.5 years to three years in conjunction, and consistent, with changing the annual grant date from July to February. The Committee chose relative TSR and growth in diluted EPS because it believes that they are aligned with stockholder value creation both directly (TSR) and indirectly (growth in diluted EPS). Associated weightings and goals are as follows:

 

 

 

 

 

 

 

Performance units earned based on TSR results are payable in cash, and performance units earned based on EPS results are payable in our Common Stock. The Committee believes that providing a significant portion of the incentives in our Common Stock results in increased share ownership among our executives, further aligning the long-term interests of the named executive officers with those of L-3’s stockholders.

 

Performance falling between any of the identified performance levels for TSR or growth in diluted EPS in the charts above will result in an interpolated vesting (for example, a 9% EPS Growth Rate will yield a unit multiplier of 125%).

 

Restricted Stock Units.  Restricted stock units are a regular component of our long-term incentive program. The Committee believes that restricted stock units enhance retention of L-3’s senior executives. The Committee may also make these awards to recognize increased responsibilities or special contributions, to attract new executives, to retain executives or to recognize certain other special circumstances. Restricted stock unit grants generally have the following characteristics:

 

 

Long-Term Incentive Grant Practices.  The Committee approves all long-term incentive awards to the named executive officers at in-person or telephonic meetings on annual basis. It is the Committee’s general policy to grant long-term incentive awards to the named executive officers either (1) during window periods we establish following quarterly or annual announcements of historical earnings results or (2) at Committee meetings held in connection with or following new hires or promotions. In 2009 and prior years, long-term incentive awards were granted to the named executive officers at the first Committee meeting held following the release of our second quarter earnings results. Beginning in 2010, the Committee determined to grant long-term incentive awards to the named executive officers following the release of our fourth quarter earnings results for the prior fiscal year. In connection with Mr. Kantor’s pending promotion, the Committee approved additional long-term incentive awards for Mr. Kantor at a meeting held following the release of our first quarter earnings results for 2010. The exercise price of any stock option granted by the Committee is the NYSE closing price for our

Common Stock on the date on which the Committee approves the awards. We do not have a program, plan or practice to grant equity-based awards to any employees in coordination with the release of material nonpublic information.

 

2011 Compensation Decisions

 

At the Committee’s meeting held on February 24, 2011, the Committee approved increases to the base salaries of the named executive officers, other than the Chief Executive officer, on average, of approximately 3.3%. At that meeting, the Chief Executive Officer requested that he not receive any increase to his base salary for 2011.

 

At the same meeting, the Committee awarded long-term incentives to the named executive officers in the form of stock options, performance units and restricted stock units, in each case having substantially identical terms as those awarded in February 2010 and described above in “2010 Long-Term Incentives” except as otherwise noted below.

 

Based on the factors generally described in “2010 Long-Term Incentives,” the Committee approved the following long-term incentive awards for the named executive officers:

 

 

 

 

For benchmarking purposes, the Committee, based in part on the recommendation of Mercer, considers long-term incentive awards in the context of the resulting target total direct compensation levels (base salary, target annual incentives and the grant date value of long-term incentives). Based on the above awards, target total direct compensation for Mr. Strianese was between the 50th and the 75^th percentiles for his position relative to competitive market data, while target total direct compensation for the other named executive officers, on average, was between the 25^th and the 50^th percentiles for their positions relative to competitive market data.

 

The grant date values approved by the Committee as described above were allocated among stock options, performance units and restricted stock units, by utilizing the target mix and valuation methodology described in “2010 Long-Term Incentives,” with each stock option award valued at $15.57 and each restricted stock unit or performance unit award valued at $80.17 for purposes of this allocation. The resulting amounts of stock options, restricted stock units and performance units awarded to each named executive officer are as follows:

 

 

 

 

The performance requirements for the 2011 TSR-Based Performance Units are identical to those applicable to the 2010 TSR-Based Performance Units. For a further discussion, see “2010 Long-Term Incentives — Performance Units” beginning on page 40. The performance requirements for the 2011 EPS-Based Performance Units are as follows:

 

 

 

 

Consistent with prior years, the Committee determined the EPS growth rate targets set forth above based on the Company’s annual business plan for 2011 and the Company’s 2011 EPS financial guidance at the time the performance units were granted. The 2011 financial guidance reflects, among other factors, our assumption that DoD base budgets will generally grow at a slower rate and will flatten or modestly decline in select areas, as compared to the recent past, and also that future supplemental appropriations for Overseas Contingency Operations will decline from existing levels. The Company generates approximately 75% of its annual sales from the DoD. For the U.S. Government fiscal years ending September 30, 2011, 2012 and 2013, the DoD base budget is projected to have a combined annual growth rate of approximately 2.6% compared to the fiscal year ended September 30, 2010 based on the fiscal year 2012 base budget request submitted by the presidential administration to Congress on February 14, 2011.

 

In considering the appropriate EPS growth rate targets to use relative to this more challenging economic environment, the Committee made the following changes to ensure that the 2011 targets remained meaningful and rigorous: (1) the “threshold” growth rate requirement was changed to reflect the “high end” of the Company’s 2011 financial guidance (instead of the “mid-point” of the guidance used for the 2010 and prior-year awards), (2) the “target” growth rate requirement was increased to be three percentage points above the threshold growth rate (instead of the two percentage point difference used for the 2010 and prior-year awards) and (3) the “maximum” growth rate requirement was increased to be eight percentage points above the threshold growth rate (instead of the seven percentage point difference used for the 2010 and prior-year awards). Accordingly, the “threshold” performance requirement of 2% growth approximates the high end of the Company’s published financial guidance for 2011 EPS (i.e., EPS of $8.55 based on the Company’s January 2011 guidance) as compared to adjusted diluted EPS for 2010 (i.e., $8.38 as described in Note 1 to the table above), while the “target” and “maximum” growth rate requirements are 5% and 10%, respectively.

 

The Committee also considered the Company’s 2011 financial guidance relative to the 2011 financial guidance published by the Company’s core defense group peers during the same period (i.e., between January 26 and February 9, 2011). The Committee determined that the growth rate represented by the high end of L-3’s 2011 financial guidance exceeded the average growth rate represented by the high end of the peers’ financial guidance when compared to each company’s respective 2010 actual EPS achievement. Based on this determination and the underlying rationale for the Company’s 2011 financial guidance discussed above, the Committee concluded that the reduced EPS growth levels reflected in the Company’s 2011 financial guidance were primarily driven by market factors applicable to the defense industry generally, and not as a result of company-specific performance concerns. Accordingly, the Committee determined that even though the growth rate

requirements for the 2011 EPS-Based Performance Units were being reduced from 2010 levels, it would not be appropriate to consider this reduction as a factor in determining the 2011 grant date values awarded to the named executive officers in respect of these awards, particularly in light of the other changes made by the Committee as discussed above to ensure that the 2011 targets remained meaningful and rigorous relative to the more challenging economic environment.

 

Payment of Performance Unit Awards for the 2008-2010 Award Cycle

 

At its February 24, 2011 meeting, the Committee reviewed and certified the performance for the performance units awarded to the named executive officers in 2008. Payouts under the 2008 performance units were contingent upon L-3’s diluted EPS and relative TSR achievements over the 2.5-year period from June 28, 2008 through December 31, 2010. With respect to the performance units based on growth in diluted EPS, the Company’s cumulative diluted EPS for the period was $20.05, reflecting compound annual EPS growth of 13.9%. The number of shares of our Common Stock issued for this performance equaled approximately 182% of the applicable target number of EPS-based performance units originally awarded to the named executive officers in 2008. With respect to the performance units based on relative TSR, L-3’s total stockholder return for the period was below the 40th percentile of the other companies within the S&P 1500 Aerospace & Defense Index, and, accordingly, no payments were made in respect of these units. For a further discussion, see “Tabular Executive Compensation Disclosure — 2010 Option Exercises and Stock Vested” beginning on page 56.

 

Other Pay Elements

 

The named executive officers are eligible to participate in the same benefits and severance that we offer to our other senior executives. These include:

 

 

Retirement Benefits

 

L-3 provides retirement benefits as part of a competitive pay package to retain its employees. All of L-3’s named executive officers participate in the L-3 Communications Corporation Pension Plan (the “Corporate Pension Plan”), which is a tax-qualified defined benefit plan, and in a nonqualified Supplemental Executive Retirement Plan (the “Restoration Plan”). The Restoration Plan provides benefits that make up for benefits that are not accrued under L-3’s tax-qualified defined benefit plans due to limits imposed by the Internal Revenue Code. The Corporate Pension Plan and Restoration Plan are designed such that the combined annual amount a named executive officer would receive with 30 years of employment by L-3 equals approximately 45% to 55% of his or her final average pay (base salary and annual incentive).

 

Messrs. Brunson and Dunn participate in the Corporate Pension Plan and Restoration Plan, and prior to being transferred to L-3’s corporate payroll on February 26, 2007 and December 27, 2003, respectively, accrued benefits under the L-3 Communication Systems — West Retirement Plan and the L-3 Link Simulation and Training Retirement Plan, respectively. Both of these plans are tax-qualified defined benefit plans.

 

No employee contributions are required to participate in any of the tax-qualified plans described above or the Restoration Plan. For a more detailed discussion of these plans, see the 2010 Pension Benefits table and the discussion that follows the table beginning on page 57 of this proxy statement.

 

A significant portion of the 2010 amounts reported in the Summary Compensation Table on page 49 under the heading “Change in Pension Value and Nonqualified Deferred Compensation Earnings” reflect changes in actuarial assumptions, and are not the result of any special arrangements entered into between the Company and any named executive officer that modify any of our pension

plans or enhance any benefits accrued or to be accrued thereunder. For a further discussion, see Note 5 to the Summary Compensation Table.

 

All of L-3’s named executive officers also participate in a component of our 401(k) plan under which L-3 matches 80% of an employee’s contributions up to 5% of his or her base salary, subject to any limitations imposed by the Internal Revenue Code. Our 401(k) plan also allows for catch-up contributions by eligible participants beginning in the year they attain the age of 50, which are matched at the same percentage as other employee contributions.

 

Every other year, the Committee reviews the relevant benefits provided to Mr. Strianese and the other named executive officers in relation to the peer group as part of a total remuneration analysis. In 2009 — when the Committee most recently requested that Mercer review the competitiveness of retirement benefits — the annualized dollar value of retirement benefits for Mr. Strianese was approximately at the 50th percentile for his position relative to competitive market data, while the annualized dollar value for the other named executive officers, on average, was below the 25th percentile relative to competitive market data.

 

Deferred Compensation Plans

 

To provide employees with additional savings opportunities, which helps attract and retain employees, L-3 established the L-3 Communications Corporation Deferred Compensation Plan I and L-3 Communications Corporation Deferred Compensation Plan II (collectively, the “L-3 Deferred Compensation Plans”). These plans allow for voluntary deferrals by executives, including the named executive officers, of up to 50% of salary and 100% of annual cash incentive awards into an unfunded, nonqualified account. We do not make any contribution to any named executive officer’s account. Deferred amounts receive interest at the prime rate. The Committee, based in part upon a market assessment conducted by Mercer in 2009 — when the Committee most recently requested that Mercer review the competitiveness of the deferred compensation program — believes that the benefits provided under the L-3 Deferred Compensation Plans are generally in line with market practices.

 

Employment and Severance Arrangements

 

L-3 currently does not have any employment agreements with its named executive officers. L-3 also does not have any formal arrangements that provide for severance to the named executive officers other than in connection with a change in control. For further discussion, see “Change in Control Arrangements” below and “Tabular Executive Compensation Disclosure — Potential Payments Upon Change in Control or Termination of Employment” beginning on page 62.

 

Change in Control Arrangements

 

To preserve morale and productivity and encourage retention in the face of the disruptive impact of an actual or rumored change in control, we provide a bridge to future employment in the event a named executive officer’s job is eliminated as a consequence of a change in control. L-3’s Change in Control Severance Plan is intended to align executive and stockholder interests by enabling each executive to consider corporate transactions that are in the best interests of the stockholders and other constituents without undue concern over whether the transactions may jeopardize the executive’s own employment. The plan provides a lump sum payment and continuation of benefits as a result of a termination of employment by L-3 without cause or by the employee for good reason during the two years following a change in control, plus protection for pre-change in control terminations that occur at the request of an acquirer or otherwise in anticipation of a change in control. The lump sum payment (severance amount) for each named executive officer is a multiple of base salary and average annual bonus for the three years prior to the year of termination, plus unpaid bonus for the current year earned through the termination date. The multiple for Messrs. Strianese, D’Ambrosio and Brunson is 3.0, and the multiple for Messrs. Dunn and Kantor is 2.5. Upon a change in control, all unvested equity awards vest immediately. Based in part upon information provided by Mercer, the Committee believes that the benefits and terms under the change in control arrangements are appropriate.

For all named executive officers, if the change in control severance payment, when aggregated with all other change in control payments, would subject the named executive officer to an excise tax under Section 280G of the Code, then the severance payment will be reduced to the highest amount for which no excise tax would be due. This severance payment reduction will occur only if the reduced amount is greater than the unreduced amount net of the excise tax.

 

For a discussion of amounts that would be realized by L-3’s named executive officers upon a change in control, see “Tabular Executive Compensation Disclosure — Potential Payments Upon Change in Control or Termination of Employment” beginning on page 62.

 

Perquisites

 

To facilitate the attraction and retention of highly qualified executives, we provide the named executive officers with other specified benefits that we believe are consistent with current market practices. We do not provide any tax gross-ups to our named executive officers. In 2010, the named executive officers were eligible for an executive physical, supplemental life insurance and participation in an executive medical plan.

 

In addition, for security purposes, Mr. Strianese is provided with a company car and security driver and has access to L-3’s fractionally-owned aircraft for occasional personal use. The incremental cost incurred by L-3 for the use of the company car and security driver by Mr. Strianese is disclosed in Note 6 to the Summary Compensation Table on page 50. Mr. Strianese reimbursed L-3 for the total incremental cost incurred by L-3 in connection with his personal use of the aircraft in 2010, as required by L-3’s policy.

 

Every other year, the Committee also reviews the relevant benefits provided to Mr. Strianese and the other named executive officers in relation to the compensation peer group as part of a total remuneration analysis. In 2009 — when the Committee most recently requested that Mercer review the competitiveness of perquisites — the annualized dollar value of perquisites for Mr. Strianese was below the 25th percentile for his position relative to competitive market data, while the annualized dollar value for the other named executive officers, on average, was at the 25th percentile relative to competitive market data.

 

Stock Ownership Guidelines

 

The Committee believes that executives should accumulate a meaningful level of ownership in L-3 shares over time and that such ownership will further reinforce stockholder value creation. The current stock ownership guidelines for the named executive officers are as follows:

 

 

In addition to the guidelines above, all Group Presidents and the General Counsel are subject to the guideline of 3X base salary, and other executives have guidelines of between 1X and 2X base salary. The Committee reviews progress towards guideline achievement annually. The guidelines are currently in effect, but executives have until the later of June 28, 2012 or five years from the date they become subject to the guidelines to achieve the minimum level of ownership. An executive whose ownership is below the applicable guideline after that time will receive annual cash bonuses entirely in the form of our Common Stock that cannot be sold until the guideline requirement is met.

 

“Stock ownership” is defined to include 100% of shares of Common Stock held outright, shares and share equivalents held in benefit plans and unvested restricted stock units; and 50% of the value of vested, “in-the-money” stock options.

 

Other Factors Affecting Compensation

 

We make reasonable efforts to maximize the tax deductibility of compensation paid to the named executive officers and to achieve favorable accounting treatment, provided that it does not conflict with intended plan design or program objectives.

Limitations on Deductibility of Compensation.  Section 162(m) of the Internal Revenue Code generally limits the tax deductibility of compensation paid by a public company to its chief executive officer and certain other highly compensated executive officers (“covered employees”) to $1 million in the year the compensation becomes taxable to the executive, subject to an exception for performance-based compensation that meets specified requirements. The Committee considers the impact of this rule when developing and implementing its executive compensation programs. The Committee believes, however, that it is important to preserve flexibility in administering compensation programs in a manner designed to promote varying corporate goals. Accordingly, the Committee has not adopted a policy that all compensation must qualify as deductible under Section 162(m).

 

Based on the factors discussed under “2010 Base Salary,” the Committee determined to pay Mr. Strianese a base salary in excess of $1 million in order to remain competitive. The Committee determined that the additional base salary is appropriate even though the excess over $1 million is not deductible. In addition, awards under the annual incentive plan do not qualify as deductible under Section 162(m). The Committee has structured the annual incentive plan to retain and motivate L-3’s executives and to encourage strong performance on an annual basis. The Committee has determined that maintaining flexibility with respect to its short-term compensation program outweighs the ability to achieve maximum tax efficiency.

 

With respect to long-term incentives, the Committee has structured L-3’s stock option and performance unit awards to qualify as deductible under Section 162(m). Restricted stock unit awards do not qualify as deductible. Nevertheless, the Committee has determined to include restricted stock unit awards as part of our long-term incentive program in order to enhance retention of L-3’s senior executives.

 

Accounting and Tax Considerations.  L-3 considers the accounting implications of all aspects of its senior executive compensation program. For example, awards to the named executive officers of stock options, restricted stock units and performance units payable in shares of our Common Stock qualify for fixed (as opposed to variable) accounting treatment under the accounting standards for share-based compensation. Performance units payable in cash qualify for variable (as opposed to fixed) accounting treatment. However, accounting treatment is just one of many factors considered by the Committee when designing compensation plans and making pay determinations.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and discussion with management, the Compensation Committee recommended to L-3’s Board of Directors that the Compensation Discussion and Analysis be included in L-3’s proxy statement and Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

 

During 2010, Robert B. Millard, Lewis Kramer (since February 2010), John M. Shalikashvili, Alan H. Washkowitz and John P. White served as members of the Compensation Committee.

 

Robert B. Millard (Chairman)
Lewis Kramer
John M. Shalikashvili
Alan H. Washkowitz
John P. White

 

The following table provides summary information concerning compensation paid or accrued by us to or on behalf of our Chairman, President and Chief Executive Officer, our Senior Vice President and Chief Financial Officer and each of our three other most highly compensated executive officers, collectively referred to herein as the named executive officers.

 

 

 

 

 

 

 

 

 

 

The following table provides information on stock options, restricted stock units and performance units granted in 2010 to each of our named executive officers under the L-3 Communications Holdings, Inc. Amended and Restated 2008 Long Term Performance Plan. Plan-based awards are generally granted to the named executive officers on an annual basis at the first Compensation Committee meeting held following the release of L-3’s fourth quarter earnings results for the prior fiscal year.

 

 

 

 

 

The following table provides information with respect to holdings of exercisable and unexercisable stock options and unvested, and as applicable, unearned restricted stock units and performance units held by the Company’s named executive officers at December 31, 2010.