The defense sector has had a rough few years. Amid talk of a growing U.S. deficit that needs drastic spending cuts, defense has come under fire for costing federal taxpayers more than $530 billion in 2010 alone. This scrutiny has not only hurt defense companies' bottom lines, but also their stock prices, as investors worry that the government will continue to cut spending and batter defense profits.
But one defense company may have something special up its sleeve.
All hail the CEO
As of 2010, Northrop Grumman (NYSE: NOC ) has a new CEO, Wesley Bush. With more than 27 years of experience in the aerospace and defense industry, Bush brings a wealth of knowledge to the table. But more importantly, more than 90% of Bush's compensation is tied directly to company performance.
Although Northrop Grumman does benchmark its compensation program with peer competitors like Boeing (NYSE: BA ) , Caterpillar (NYSE: CAT ) , Honeywell International (NYSE: HON ) , L-3 Communications (NYSE: LLL ) , Textron (NYSE: TXT ) , and United Technologies (NYSE: UTX ) as a way of maintaining competitive relative pay levels, Northrop Grumman's compensation policy is largely based on company and individual performance.
For example, in 2010, Northrop Grumman factored in new business awards, pension-adjusted operating margin, free cash flow conversion, and six non-financial metrics -- including customer satisfaction, engagement, quality, etc. -- to determine Bush's target bonus.
Most tellingly, Bush got his reward in stock and stock options. For 2010, Bush received $8.4 million in stock options. When you consider that his base salary was $1.3 million, $8.4 million in stock options is a huge incentive to grow the company's stock price in the future.
With factors such as the above determining compensation, perhaps it's no wonder that in 2010:
- Sales increased from $33.8 billion to $34.8 billion.
- Earnings per share from continuing operations increased 39%.
- Free cash flow totaled $1.7 billion, exceeding the upper end of the prior guidance.
- 19.7 million shares were repurchased because of strong cash flow.
- The company raised its quarterly dividend in May by 9.3%, which was the seventh consecutive annual increase.
- Total backlog exceeded $64 billion, with a total of $30 billion in new awards.
What this means for investors
When a company places as much incentive on its CEO to do well as Northrop Grumman does, you can bet that the CEO will work his butt off to make sure the company profits, regardless of hard economic times, as Northrop Grumman's 2010 numbers confirm. All of this is great news for Northrop Grumman investors.
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