United Technologies DEF 14A 2008
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SCHEDULE 14A INFORMATION
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February 22, 2008
NOTICE OF ANNUAL MEETING OF SHAREOWNERS
Dear Fellow Shareowner:
We are pleased to invite the shareowners of United Technologies Corporation to attend the 2008 Annual Meeting of Shareowners. The meeting will be held on April 9, 2008 in the South Atrium of Pratt & Whitney Canadas main facility located at 1000 Marie-Victorin Boulevard, Longueuil, Quebec, Canada. The doors will open at 1:30 p.m. and the meeting will begin at 2:00 p.m. The meeting will address the following matters:
Shareowners of record of UTC Common Stock at the close of business on February 12, 2008, the record date for the meeting, and their authorized representatives by proxy will be entitled to attend and vote at the meeting.
Since seating is limited, please request a ticket in advance in order to attend. Please refer to page 3 of the enclosed Proxy Statement for further information concerning tickets.
YOUR VOTE IS VERY IMPORTANT. PLEASE SUBMIT YOUR PROXY OR VOTING INSTRUCTIONS AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. Most shareowners have a choice of voting over the Internet, by telephone or by using a traditional proxy card. Please refer to the enclosed proxy materials or the information forwarded by your bank, broker or other holder of record to see which voting methods are available to you.
PLEASE CONFIRM YOUR PREFERENCE FOR ELECTRONIC DELIVERY OF FUTURE ANNUAL MEETING MATERIALS. You can expedite delivery of your annual meeting materials and avoid costly mailings by confirming in advance electronic delivery as your preferred method of delivery. For further information on how to take advantage of this cost-saving service, please see page 42 of the enclosed Proxy Statement.
TABLE OF CONTENTS
UNITED TECHNOLOGIES CORPORATION
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the Annual Meeting, please submit your proxy or voting instructions as soon as possible so that your shares can be voted at the meeting in accordance with your instructions.
Our Board of Directors is soliciting proxies for the 2008 Annual Meeting of Shareowners of United Technologies Corporation (UTC, the Corporation or the Company) to be held on April 9, 2008. We began making this Proxy Statement available to shareowners on or about February 22, 2008.
Important Notice Regarding the Availability of Proxy Materials for the Shareowner Meeting to be held on April 9, 2008. UTCs 2008 Proxy Statement and UTCs Annual Report for 2007 are available at www.edocumentview.com/utx.
How does the Board of Directors recommend that I vote on the matters to be considered at the meeting?
The following proposals will be considered at the meeting:
The Board recommends that you vote:
FOR each of the Boards nominees for election as directors,
FOR the appointment of PricewaterhouseCoopers LLP as Independent Auditors for 2008,
FOR approval of the amendment to the 2005 Long-Term Incentive Plan, and
AGAINST each of the shareowner proposals.
Who is entitled to vote? You are entitled to vote the shares of UTC Common Stock (Common Stock) you owned at the close of business on February 12, 2008, which is referred to as the record date. We will make available a list of registered shareowners entitled to vote. The list will be available at UTCs offices, One Financial Plaza, Hartford, CT, for ten days prior to the meeting and at the meeting location during the meeting.
How can I vote my shares? If your shares are registered directly in your name with UTCs stock registrar and transfer agent, Computershare Trust Company, N.A. (Computershare), you are considered the registered shareowner for those shares. As the registered shareowner, you have the right to vote those shares and we will send you the proxy materials and a proxy card (or provide electronic access as described below in the response to the question Can I vote by telephone or via the Internet?).
Most UTC shareowners hold their shares through a broker, bank, trustee or another nominee, rather than shares registered directly in their name. In that case, you are considered the beneficial owner of shares held in street name, and the proxy materials are being forwarded to you by your broker, bank, trustee or nominee, together with a voting
instruction card. As the beneficial owner, you are entitled to direct the voting of your shares by your intermediary. Because a beneficial owner is not a registered shareowner, you may not vote those shares in person at the meeting unless you obtain a legal proxy from the broker, bank, trustee or nominee that holds your shares, giving you the right to vote the shares directly. Accordingly, to vote in person, you will need to contact your broker, bank, trustee or nominee to obtain a legal proxy, and present the proxy at the meeting in order to receive a ballot to vote at the meeting.
We recommend that you vote your shares in advance of the meeting, using one of the voting methods described below.
How can I vote my shares held in the UTC Employee Savings Plan? You can direct the voting of your shares in the ESOP Fund and the Common Stock Fund under the UTC Employee Savings Plan by returning a voting instruction card or by providing voting instructions by telephone or via the Internet. If you do not provide voting instructions (or if your instructions are incomplete or unclear) as to one or more of the matters to be voted on, the trustee will vote all of your uninstructed ESOP Fund shares for the voting choice for which the trustee casts the greatest number of votes pursuant to voting instructions received from ESOP Fund participants who do submit voting instructions. The trustee also will vote your uninstructed Common Stock Fund shares for the voting choice for which the trustee casts the greatest number of votes pursuant to instructions from Common Stock Fund participants who do submit voting instructions. The trustee will vote all unallocated Common Stock in the ESOP Fund for the voting choice for which the trustee casts the greatest number of votes pursuant to instructions from ESOP Fund participants who do submit voting instructions.
IMPORTANT NOTICE TO PARTICIPANTS IN THE UTC SAVINGS PLAN FOR EMPLOYEES IN THE UNITED STATES: Computershare must receive your voting instructions by 1:00 PM, Eastern Daylight Saving Time, on April 8, 2008 in order to tabulate voting instructions of Savings Plan Participants and communicate those instructions to the Savings Plan trustee, who will vote your shares.
What voting methods are available? We send proxy cards and offer electronic voting to all registered shareowners to enable them to vote their shares. For those registered shareowners who previously have elected to receive electronic access to their proxy materials (rather than receiving mailed copies) and many active U.S. employees who participate in the UTC Employee Savings Plan, we will send you email notification as to how to submit your proxies or voting instructions. Brokers, banks and nominees typically offer telephonic or electronic means by which the beneficial owners of shares held by them can submit voting instructions, in addition to the traditional mailed voting instruction cards. Shareowners who submit a proxy card or voting instructions need not vote at the meeting. However, we will pass out written ballots to any registered shareowner or holder of a legal proxy who wishes to vote in person at the meeting.
Can I vote by telephone or via the Internet? Yes. When voting by telephone or via the Internet, you should refer to the proxy card mailed to you (or the email message you receive with instructions on how to vote), which has the proxy access number you will need to authenticate your vote.
Please note that the facilities for telephone and Internet voting cannot accommodate cumulative voting for the election of directors, and therefore if you wish to exercise cumulative voting rights you must submit a proxy card or voting instructions by mail.
How will the proxy holders vote my shares? The proxy holders designated on the Proxy Card will vote your shares in accordance with your instructions given on the Proxy Card, by telephone or via the Internet. If you sign and return your Proxy Card but do not indicate voting instructions on one or more of the matters listed, the proxy holders will vote your uninstructed shares:
If you hold your shares through a broker and do not provide your broker with specific voting instructions, under the rules that govern brokers in such circumstances, your broker will have the discretion to vote such shares on routine matters, but not on non-routine matters. As a result:
As the proposals to be acted upon at the Annual Meeting include both routine and non-routine matters, we anticipate that brokers may turn in a proxy card that votes uninstructed shares FOR the election of directors and appointment of Independent Auditors, but expressly states that the broker is NOT voting on the remaining proposals. The brokers instructions with respect to the remaining proposals in this case are referred to as broker non-votes. In tabulating the voting result for any particular proposal, shares that constitute broker non-votes are not considered.
Who can attend the Annual Meeting and how can I request tickets? If you were a registered or beneficial shareowner of UTC Common Stock at the close of business on February 12, 2008, you or your authorized proxy may attend. Since seating is limited, we ask that you request tickets in advance to attend. If your shares are registered in your name on the records of Computershare, or if you are a beneficial owner of shares through a UTC employee savings plan, you can request tickets by sending an email request to the Corporate Secretary at email@example.com or by returning the Ticket Request Card provided with the mailed Annual Meeting materials. If you forget to bring a ticket, you will be admitted to the meeting only if you provide proof that you were a registered shareowner or beneficial owner of shares through a UTC employee savings plan as of February 12, 2008 and provide proof of identification. If you hold shares through a broker, bank, trustee or nominee you may request a ticket by writing to the Corporate Secretary and including a copy of an account statement or a legal proxy from the broker, bank, trustee or nominee, in either case showing your ownership of shares as of February 12, 2008.
PROPOSAL 1: ELECTION OF DIRECTORS.
General Information Concerning the Board of Directors. Our entire Board is elected annually by the shareowners. The Board, upon the recommendation of the Committee on Nominations and Governance, has nominated for election as directors at the Annual Meeting the twelve nominees listed below, each of whom is a current director. Current directors Frank P. Popoff and H.A. Wagner are not standing for re-election this year and will retire from the Board on April 9, 2008, because each is 72 years of age. UTCs Corporate Governance Guidelines require that directors retire from the Board as of the next annual meeting following the attainment of age 72.
The Board has adopted independence standards for directors that conform to the independence requirements set forth in NYSE listing standards. Copies of these independence standards are available on UTCs website at http://investors.utc.com/downloads/principles.pdf and are included in Appendix A to this Proxy Statement.
The Board has affirmatively determined that each person who served as a director of UTC in 2007, other than Messrs. David and Chênevert, is independent in accordance with these standards. Specifically, none of the nominees that qualify as independent has a business, financial, family or other type of relationship with UTC (other than as a director and shareowner of UTC), except for any relationships that are immaterial under UTCs independence standards. In determining that each such director is independent, the Board considered that UTC and its subsidiaries in the ordinary course of business sell products and services to, or purchase products and services from, companies at which some of the nominees are or have been employed as officers or serve as directors. Directors Faraci, Garnier, McGraw, Swygert, Villeneuve and Wagner serve as officers and/or directors of entities that purchase products or services from UTC. Directors Faraci, Garnier, McGraw and Swygert serve as officers and/or directors of entities that provide products or services to UTC. In each case, the amounts paid to, or received by, UTC annually from these companies were well below the 2% of total revenue threshold in UTCs independence standards. The Board also considered charitable contributions that UTC gave to organizations with which Directors McGraw and Swygert are or have been associated, but which do not conflict with UTCs independence standards since the director did not serve as an executive officer of the organization or the amounts contributed by UTC did not exceed the thresholds in UTCs independence standards. The Board determined that none of these relationships impaired the independence of the directors.
If any of the nominees become unavailable prior to the Annual Meeting to serve as a director, the Board may select a replacement nominee or reduce the number of directors to be elected. The proxy holders will vote the shares for which they serve as proxy for any replacement candidate nominated by the Board.
Nominees. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREOWNERS VOTE FOR EACH OF THE FOLLOWING NOMINEES:
Committees of the Board. The standing committees of the Board consist of the Audit Committee, the Committee on Nominations and Governance, the Committee on Compensation and Executive Development, the Finance Committee and the Public Issues Review Committee. Each committee, other than the Finance Committee, is composed solely of directors determined by the Board to be independent in accordance with NYSE listing standards. Copies of the charters of each committee are available on UTCs website at http://investors.utc.com/charters.cfm.
The Audit Committee assists the Board in its oversight of the integrity of UTCs financial statements and the qualifications and independence of the Independent Auditors. The Committee also nominates, for appointment by shareowners, an accounting firm to serve as Independent Auditors and is responsible for the compensation, retention and oversight of the Independent Auditors. Directors Faraci, McCormick, Myers, Popoff (Chairman), Swygert, Villeneuve and Wagner are members of the Committee. The Board has determined that Directors Faraci, McCormick, Popoff, Villeneuve and Wagner are audit committee financial experts within the meaning of the rules of the Securities and Exchange Commission (SEC). During 2007, the Committee held eight meetings.
The Committee on Nominations and Governance recommends criteria for service as a director and, when there is a vacancy on the Board, identifies, evaluates and recommends for nomination by the Board candidates for election as a director. The Committee also reviews and recommends appropriate governance practices and compensation for directors. Directors Faraci, Garnier, Lee, McCormick (Chairman), Swygert, Wagner and Whitman are members of the Committee. The Committee has determined that candidates for the Board should have the following qualifications:
The Committee considers candidates meeting these criteria who are suggested by directors, management and shareowners. UTC from time to time engages one or more search firms to assist in the identification and evaluation of qualified candidates. The Committee will consider director candidates recommended by shareowners, who may submit recommendations by letter addressed to the Corporate Secretary. During 2007, the Committee held four meetings.
The Committee on Compensation and Executive Development is responsible for review and oversight of executive compensation and development programs, approval of corporate goals and objectives relevant to Chief Executive Officer (CEO) compensation, setting the CEOs compensation based on an evaluation of performance in light of these goals and objectives, and review of long-term incentive plans and annual incentive compensation. The Committee makes compensation decisions affecting the executive officers and members of UTCs Executive Leadership Group (the ELG). The CEO, Chief Operating Officer (COO) and the Senior Vice President, Human Resources and Organization (SVP, HR) determine other executives compensation and oversee program administration. The Committee also reviews management development policies and programs.
Directors Garnier, Lee, McCormick, McGraw, Popoff and Wagner (Chairman) are members of the Committee. UTC has engaged Towers Perrin, an outside human resources consulting firm, to provide peer company compensation data. Management also provides information and proposals for the Committees consideration. While the CEO, COO and SVP, HR attend Committee meetings regularly by invitation, the Committee, subject to Board oversight, is the final decision maker regarding the compensation paid to each of the named executive officers listed in the Summary Compensation Table on page 19, the members of the ELG and other executive officers. The Committee considers certain matters in executive session. The Committees Chairman reports to the Board on actions taken at each meeting. During 2007, the Committee held six meetings. The Committee has authority to retain, approve fees for and terminate independent advisers to assist in fulfillment of its responsibilities.
The Finance Committee reviews and makes recommendations to the Board on the management of the financial resources of UTC and major financial strategies and transactions. Directors Chênevert, David, Gorelick, Lee (Chairman), McGraw, Myers, Popoff and Villeneuve are members of the Committee. During 2007, the Committee held seven meetings.
The Public Issues Review Committee reviews UTCs charitable contributions program, community relations programs, political action committee, and responses to public issues such as equal employment opportunity, the environment, and safety in the workplace. The Committee also reviews UTCs annual Corporate Responsibility Report. Directors Garnier (Chairman), Gorelick, McGraw, Swygert, Villeneuve and Whitman are members of the Committee. During 2007, the Committee held four meetings.
Attendance. The Board met seven times during 2007. Each director attended 75% or more of the aggregate number of meetings of the Board and committees on which he or she served. The non-management directors meet in regularly scheduled executive sessions. Currently Mr. Wagner serves as Presiding Director at executive sessions. In view of Mr. Wagners retirement, the non-management directors will select a successor from among themselves to preside at executive sessions following the 2008 Annual Meeting. The Boards policy is that directors standing for re-election should attend the Annual Meeting of Shareowners if their schedules permit. All of the current directors were present at the last Annual Meeting held in April 2007.
Security Ownership of Directors, Executive Officers and Certain Beneficial Owners. The following table shows, as of February 12, 2008, the shares of Common Stock beneficially owned by each director, each of the six named executive officers listed in the Summary Compensation Table on page 19 of this Proxy Statement and all directors and executive officers as a group. Each director and executive officer beneficially owned less than 1% of the outstanding shares of Common Stock. The directors and executive officers as a group beneficially owned approximately 1.5% of the outstanding Common Stock. Unless otherwise indicated in the notes to the table, each of the persons listed had sole voting power and investment power with respect to the shares shown as beneficially owned.
In a filing made with the SEC, State Street Bank & Trust Company, acting in various fiduciary capacities, reported that it held as of December 31, 2007 sole voting power with respect to 37,348,324 shares of UTC Common Stock, shared voting power with respect to 65,761,775 shares of UTC Common Stock, and shared dispositive power with respect to 103,110,099 shares of UTC Common Stock. State Street Bank & Trust Company serves as Trustee for UTCs Employee Savings Plan and disclaims beneficial ownership of the reported shares.
This Compensation Discussion and Analysis (CD&A) reviews the compensation policies and decisions of the Committee on Compensation and Executive Development (the Committee) with respect to UTCs named executive officers listed in the Summary Compensation Table (the NEOs).
Under the oversight of the Committee, UTC maintains an executive compensation program for its senior executives, including its NEOs, that is heavily focused on performance. The design and operation of the program reflect the following objectives:
To accomplish these objectives, the Committees approach emphasizes:
Each of the NEOs is a member of the Executive Leadership Group (ELG), consisting of approximately 30 of the Companys most senior executives. ELG members participate in the same compensation programs as other UTC executives, but also receive enhanced life insurance and disability benefits, a perquisite allowance, and severance protection. These additional elements provided under the ELG program are designed, in the aggregate, to provide fringe and employee benefits comparable to those of senior executives at other CPG companies.
UTC provides the following compensation elements to ELG members. Material variations between target and actual values for the NEOs are discussed under Named Executive Officer Compensation.
In addition to the compensation elements outlined above, the ELG program includes share ownership guidelines, standards of conduct, and protective covenants discussed under Protecting UTCs Interests.
Peer Group Benchmarking
The CPG consists of 25 major U.S. companies that have characteristics similar to UTC such as revenues, global scope of operations and diversified product lines, which the Committee believes makes them comparable to UTC for purposes of compensation benchmarking. Of the 25 companies listed below, 14 are included in the Dow Jones Industrial Average (as is UTC). Because of the compensation opportunities available and management skill sets required, the CPG companies are likely to be competitors of UTC for executive talent. Designing a compensation package that is competitive with the CPG therefore promotes UTCs recruitment and retention objectives.
In addition to the CPG data, the Committee utilizes general industry data drawn from approximately 370 companies. While the Committee tends to rely more heavily on CPG data, it supplements its analysis with such general industry data to diversify its compensation benchmarks. The broader data set also provides a reference for specific business units where the relevance of the CPG data may be limited.
The data for the CPG and general industry comes from Towers Perrin. This data is objective, available to others who engage Towers Perrin, and used generally by companies comparable to UTC. Towers Perrin does not make recommendations to the Committee on the form or amount of executive compensation, nor does the Committee currently retain its own consultant. At present, Towers Perrin serves the limited role of providing data relevant to the Committees decision-making process. Should the Committee engage a consultant in the future for the purpose of making executive compensation recommendations, it would select a consultant with no other material relationship with UTC.
The Committee generally uses the same benchmark data for each form of compensation and for each executive position. Individual compensation will vary from program targets based on factors such as performance, job scope, abilities, tenure, and retention risk. Compensation decisions specific to the NEOs are discussed under Named Executive Officer Compensation.
The Committee designs executive compensation packages for the NEOs and other ELG members to emphasize performance-based compensation. Fixed compensation elements, although essential to a market competitive program, are not the focal point of UTCs executive compensation program and are aimed generally at the median of the CPG. Performance metrics selected by the Committee reflect the overall goal of aligning actual compensation values with shareowner value. Base salary comprises approximately 20% of the pay mix for the ELG (including the NEOs), significantly less than for the rest of the executive population. Approximately 15% of total pay is allocated to annual bonus compensation, and 65% is allocated to long-term incentive compensation, higher than for the balance of the executive population.
The program targets total cash compensation (i.e., base salary and bonus) at the 50th percentile of the CPG. Cash above this percentile will generally result from earned increases in base salary and above-target performance in the
annual bonus program. The program targets long-term incentive compensation at the 65th percentile of the CPG for the ELG. This above-median target value for long-term awards reflects the programs emphasis and demonstrated record on compensation supporting shareowner value creation.
Allocation of long-term incentive awards between stock appreciation rights (SARs) and performance share units (PSUs) also varies with executive level. Reflecting the ELGs ability to affect performance relative to PSU vesting targets, half of the value of ELG long-term incentive awards is allocated to PSUs.
The principal elements of the NEOs fixed compensation consist of base salary, pension, benefits (e.g., health, life, and disability insurance), and perquisites. UTC targets the aggregate value of fixed compensation generally at the median of the CPG to promote recruitment and retention.
Base Salary. Base salaries for senior executives are targeted at approximately the 50th percentile of the CPG, with individual variations based on job scope, tenure, retention risk, performance, and other factors relevant to the Committee. Base salary decisions with respect to the NEOs are discussed under Named Executive Officer Compensation.
Pension. The Pension Benefits table on page 24 details retirement benefits for the NEOs. Pension benefits for executives under the cash balance plan fall below the median. The previous final average pay formula which covers executives hired before 2003 (including the NEOs) is approximately at the median. An unfunded program, with the same service formula applicable to salaried employees generally, provides defined benefit pension benefits in excess of Internal Revenue Code (the Code) limits for tax qualified plans. UTC does not match 401(k) contributions in excess of Code limits, resulting in below median values for executives (most CPG companies provide savings plan matching contributions in excess of Code limits).
Health and Welfare Benefits. While actively employed, ELG members receive life insurance coverage equal to three times their projected age 62 base salary. Upon retirement, this benefit is reduced to two times age 62 (projected or actual) base salary. Mr. David participates in a predecessor life insurance plan discussed in footnote (6)(d) to the Summary Compensation Table and not in this ELG benefit. The ELG long-term disability plan protects 100% of base salary for one year following disability and thereafter grades down 5% per year until the permanent 80% level is reached.
Perquisites. ELG members receive a perquisite allowance equal to 5% of annual base salary in lieu of in-kind perquisites. This perquisite allowance may be allocated in part to a company leased vehicle or paid in cash. During 2007, in response to a trend toward reduced perquisites, the Committee reduced the ELG perquisite allowance from 8% of salary (and from 12% for executives who joined the ELG prior to December 2005) to 5% with a one-time corresponding increase in base salary. The perquisite allowance reduction reflects the Committees objective of fixed compensation benefits at the market median. Footnote (6)(c) to the Summary Compensation Table provides the amount of each NEOs perquisite allowance. Additionally, the Chief Executive and Chief Operating Officers have access to corporate aircraft for personal travel in accordance with UTCs security policy.
Incentive compensation programs relate directly to UTCs results. There are three forms of awards:
Investors focus on earnings growth and cash flow as reliable indicators of overall near term performance. Relative TSR accurately ranks the Companys performance among other companies competing for capital. The S&P 500 provides a broad-based and widely-accepted benchmark for purposes of this relative measurement. Long-term share price appreciation generally corresponds with long-term corporate performance and therefore provides an appropriate form of compensation directly related to superior corporate results.
Annual Bonuses. The Committee annually establishes bonus pools for each of UTCs business units and the Corporate Office. The size of each pool depends on performance relative to pre-established and quantitative targets for the year, subject to adjustments the Committee may make to account for other factors that may have enhanced or detracted from the quantitative results achieved relative to the established target metrics. While bonus amounts are substantially established by performance measured against the pre-established targets, the Committee does not limit its performance assessment to a strictly formulaic calculation. It therefore retains discretion to adjust both bonus pools and the amount of individual awards. Material individual variation from bonus amounts calculated directly by the performance metrics are discussed under Named Executive Officer Compensation.
The pre-established targets for 2007 were:
Baseline performance targets for 2007 were as follows:
Baseline performance is intended to result in annual bonuses approximately at the median of the CPG. While the baseline bonus amount is benchmarked against the CPG, the Committee sets the performance targets independently of CPG performance. The Committee believes that earnings growth in the 10-12% range conforms to investor expectations for companies of UTCs size and scope. The Committee also believes that free cash flow as a percentage of earnings reflects the quality and sustainability of reported earnings and supports the important goal of cash returns to shareowners.
Baseline performance targets for the Corporate Office and business units remain the same for 2008. The Committee believes that these earnings growth targets, with corresponding cash flow performance, reliably reflect UTCs annual performance for shareowners and, as calibrated, justify above-median payouts for exceeding these targets.
The Committee determines individual awards paid from the established pools utilizing the same metrics that determine the size of the award pools, with adjustments for individual performance. The following baseline award targets as percentages of base salaries reflect median bonus targets for similar roles at CPG companies:
Baseline performance relative to the financial targets results in an award pool sufficient to pay bonuses at these levels. Awards are not generally payable if earnings growth times free cash flow content in net income falls below 70% of baseline. Award pools are capped at 160% of baseline. The annual bonus program offers the opportunity for above-median total cash compensation for above-median performance relative to the established targets. Actual NEO bonuses for 2007 performance are discussed under Named Executive Officer Compensation.
Performance Share Units. Annual long-term incentive awards consist of PSUs and SARs. The value of a PSU equals a share of UTC Common Stock. PSUs do not earn dividends. Upon vesting, PSUs convert to shares of UTC Common Stock. Performance relative to pre-established, three-year cumulative performance targets determines the vesting result. The Committee established two performance targets for PSUs awarded in 2007 and 2008, with vesting calculated independently for each target. Vesting of 50% of PSUs awarded is contingent on EPS growth with vesting for the other 50% contingent on TSR relative to the S&P 500 as follows:
The Committee selected UTCs TSR target relative to companies within the S&P 500 because this index provides a well-recognized, independent and external metric to measure the equity performance of a large cap company like UTC. The CPG, by contrast, provides a benchmark specifically focused on measuring the competitiveness of UTCs compensation packages. The S&P 500 more effectively aligns the interests of management and shareowners by measuring UTCs performance relative to a broader universe of companies.
Stock Appreciation Rights. SARs have an exercise price equal to market price at date of grant, have a ten-year term, and become exercisable after three years. Value realized upon exercise is settled in shares of UTC Common Stock. The Committee views share price appreciation as the most relevant measure of long-term performance since it directly parallels shareowner value creation. UTCs TSR over the ten-year period ending December 31, 2007 was 388%, substantially exceeding the Dow Jones Industrials (105%) and the S&P 500 (78%). The Committee believes prior SAR and stock option awards led to managements successful execution of productivity, innovation, growth, and business balance objectives aligned with shareowners interests.
ELG members participate in separate change-in-control and non-change-in-control severance arrangements. Intended to address different risks and circumstances, each arrangement provides different benefits and terms and conditions, as discussed below. Because market competitive executive compensation programs provide financial protection in the event of severance, these severance protection programs are relevant for purposes of recruitment and retention. A substantial majority of CPG companies provide such benefits. While there are variations in types and amounts of benefits, eligibility requirements, and other terms and conditions, the Committee believes that the aggregate potential value of UTCs severance and change-in-control programs does not differ substantially from other companies. Executives will not receive both change-in-control and non-change-in-control severance benefits.
Severance Protection. The ELG program provides a potential severance benefit of up to 2.5 times base salary in the event of involuntary termination (other than for misconduct) after three years as an ELG member. Payment of ELG severance requires acceptance of and adherence to protective covenants, including non-compete and non-disclosure obligations. For individuals who joined the ELG before December 2005 (including each of the NEOs), this benefit is payable at retirement and serves as a retention mechanism. The Committee has since replaced this benefit at retirement with a stock-based award that vests at age 62 for executives appointed to the ELG after December 2005, as discussed under Retention.
Retention. To retain ELG members through retirement, executives who joined the ELG after December 2005 receive a restricted share retention grant equal to two times base salary at the date of grant. These shares may not be sold, pledged, or assigned prior to vesting on retirement at age 62 or later. The shares are forfeited if the executive terminates or retires before age 62. Recipients of this award are not eligible for the ELG severance benefit if retirement occurs on or after age 62.
Executives who joined the ELG before December 2005 do not receive the restricted share retention grant, but are eligible for the ELG retirement benefit after age 62. The Committee believes that the restricted share grant has significant retention value and, as with the severance arrangement, imposes restrictive covenants. In changing this post-age 62 benefit, the Committee enhanced shareowner alignment by linking value to share price rather than salary.
Change-in-Control Benefits. The current change-in-control benefits reflect a reduction in benefits in 2003 to more closely align with market practice, providing for a cash payment equal to 2.99 times base salary and bonus, plus acceleration of long-term incentive awards. For those covered by the program before December 2003, change-in-control payments equal 3 times base salary and bonus and also include three years of benefits continuation and additional credited service for pensions, with each of these elements reduced by 1/36th for each month termination occurs after age 62. These benefits help to assure continuity of management under circumstances that reduce or eliminate job security and might otherwise lead to immediate departures. Unlike the ELG severance benefit, change-in-control benefits are payable in the event of voluntary termination following a change-in-control (i.e., a single trigger mechanism). The long standing single trigger mechanism has been maintained because the current program design adequately addresses the objective of management continuity through a change-in-control since executives must remain with the Company through completion of any such event to qualify for benefits. Senior executive redundancy in the event of a change-in-control typically leads to a significant number of departures, an outcome that is unlikely to vary materially under either the current single trigger mechanism or a program that imposes some restrictions on benefit eligible voluntary terminations. For these reasons, the Committee did not modify these provisions at the time it prospectively adopted the reduced benefit levels. The aggregate values of benefits, covenants, and other terms and conditions under each program remain within market norms for a company of UTCs size.
The Termination Payment tables on pages 25 and 26 set forth the estimated values and details of change-in-control and non-change-in-control termination benefits for each of the NEOs.
Named Executive Officer Compensation
The executive compensation programs and policies discussed above apply to each of the NEOs. Individual compensation amounts can and do vary from program benchmarks. Material variations from benchmark targets affecting the NEOs compensation in 2007 are discussed in this section.
Base Salary. The NEOs received salary increases in 2007, consistent with annual market movement, performance, and to offset the reduced perquisite allowance (see Fixed Compensation Perquisites). Mr. Davids salary is at approximately the 75th percentile of the CPG. Mr. David has been UTCs Chief Executive Officer since 1994, longer than any other Dow Jones Industrials company CEO. His base salary percentile rank reflects his leadership and performance, particularly as reflected by UTCs sustained and top quartile TSR ranking over the past ten years relative to the Dow Jones Industrials and the S&P 500 indices. Mr. Chêneverts salary is at approximately the median of the CPG for his position. Messrs. Geisler and Hayes share the responsibility of Chief Financial Officer, resulting in somewhat below-median salaries for a CFO position.
Messrs. Bousbib and Darnis lead business units whose competitors vary widely by size and consist of both stand-alone companies and subsidiaries of larger companies. Each of their salaries is at approximately the 75th percentile of market data which only reflect sector heads within large companies. Inclusion of independent companies would likely reduce the percentile rank for their base salaries. Messrs. Bousbib and Darnis run large industry leading businesses that, if independent, would each rank within the S&P 500. Otis and Carrier generated $11.9 billion and $14.6 billion in revenues, respectively in 2007. Because CEOs of independent companies are compensated substantially more than internal business unit heads, the Committee believes above-median salaries relative to UTCs peer group (which contains no independent competitors of Otis or Carrier) are appropriate for these key positions.
Annual Bonus. Actual bonuses for each of the NEOs are shown in the Summary Compensation Table on page 19. Messrs. David, Chênevert, Geisler, and Hayes participated in the 2007 Corporate Office incentive compensation award pool. Mr. Bousbib participated in the Otis pool, and Mr. Darnis participated in the Carrier pool.
The Corporations 2007 earnings per share grew 15% and free cash flow was 99% of net income, resulting in an above-target pool of 132% for the Corporate Office. Otis fell below its baseline earnings growth target but exceeded
its free cash flow target, resulting in a pool equal to 92% of baseline. However, in recognition of Otis outstanding operating margin performance relative to all of its competitors worldwide in 2007, the Committee established a pool equal to 125% of baseline. Carrier fell below its earnings growth target but exceeded its free cash flow target, resulting in a pool equal to 79% of baseline. However, three of Carriers four operating units delivered results well above baseline. The Committee determined that this strong performance combined with the significantly adverse impact of the U.S. housing recession on Carriers North American Residential business, warranted adjustment of Carriers award pool to 92% of baseline.
The determination of actual bonus amounts awarded to Messrs. Bousbib, Darnis, Geisler and Hayes, as shown in the Summary Compensation Table on page 19, aligns with the award pool factors described above, with minor adjustments based on the Committees subjective overall assessment of performance. The Committee adjusted the awards for Messrs. Chênevert and David in recognition of additional factors relevant to the assessment of their performance and leadership jointly in the Office of the CEO. UTC delivered exceptional financial performance in 2007, achieving 15% EPS growth, 14% revenue growth (9% organic), and 24% TSR in a challenging economic environment. Over the past 10 years, UTCs TSR ranks first among the Dow Jones Industrials.
In addition to the foregoing financial performance, the Committee favorably assessed progress toward CEO transition. Working effectively together, Messrs. Chênevert and David ensured continuation of UTCs record of superior financial performance as Mr. Chêneverts corporate-wide responsibilities expanded in 2007. Mr. Davids tenure as CEO is the longest of any current Dow Jones Industrials company. Under his leadership, UTCs cumulative TSR has exceeded the S&P 500 and Dow Jones Industrials indices by more than three times. Mr. Davids leadership has also been recognized independently of UTC. Barrons magazine included him for a second time in 2007 among the worlds 30 best CEOs. Institutional Investor magazine named him best CEO for the aerospace and defense electronics sector again in 2007. Barrons, Forbes, and BusinessWeek included UTC in their best companies lists last year, and Fortune magazine named UTC most admired among aerospace/defense companies for the seventh year running. These factors underscore the importance of a successful and orderly leadership transition at UTC. The Committee determined that the breadth and extent of financial performance in combination with a successfully functioning CEO transition plan warranted upward adjustments to Messrs. David and Chêneverts calculated bonuses. Mr. Davids calculated award of $3.4 million was increased to $4.0 million. Mr. Chêneverts award was adjusted from $1.5 million to $2.0 million, which is above his calculated award as UTCs President but consistent with his joint incumbency in the Office of the CEO.
Long-Term Incentive Awards. The Grants of Plan-Based Awards table on page 21 shows long-term incentive awards. Awards to each of the NEOs did not differ materially from UTCs stated 65th percentile LTIP target.
Under the prior long-term incentive plan (the Continuous Improvement Incentive Program or CIIP), the Committee granted performance-based dividend equivalents rather than PSUs. CIIP awards were last granted in 2005 with a three-year earnings per share growth target range of 7-13% annually. Actual earnings per share growth for this performance cycle reached 17% annually, resulting in a 200% vesting rate for the NEOs, as detailed in footnote (4) to the Summary Compensation Table.
The Committee generally issues long-term incentive awards at the beginning of each year to align grant dates with calendar year performance measurement periods. Out-of-cycle awards are granted on an ad hoc basis reflecting recruitment, promotion, or retention needs. The timing of such out-of-cycle awards aligns with the applicable event. No out-of-cycle awards were granted to the NEOs in 2007.
Deductibility and Dilution
The 2005 Long-Term Incentive Plan (LTIP) approved by UTCs shareowners limits shares that may be awarded and their associated dilution. Total shares prospectively issuable under PSU and SAR awards in 2007 were approximately 1% of UTC Common Shares outstanding, below the CPG median. Total shares potentially issuable under all current and prior PSU, SAR, and stock option awards are approximately 9% of UTC Common Shares outstanding at the end of 2007, in the bottom quartile of the CPG. Diluted earnings per share reflect all such shares, and both percentages are within applicable LTIP limitations.
Annual bonuses and long-term incentive awards are provided pursuant to shareowner approved plans and performance targets. Amounts paid under these programs are intended to qualify for the performance-based compensation exception under Internal Revenue Code Section 162(m) and are therefore not subject to the Section 162(m) $1 million deductibility limitation.
The Committee has approved the design and functioning of UTCs executive compensation program as outlined here, specifically including determination of benchmark targets, performance metrics, and the composition and variability of pay by executive level. While substantially guided by the stated performance metrics and formulae, the Committee retains the authority to exercise its judgment when approving pool and individual awards.
UTCs executives do not have employment agreements that guaranty compensation amounts or length of employment. The Committee specifically determines annual bonus, PSU, and SAR total award amounts for business units and the Corporate Office, and determines awards individually for ELG participants each year. As part of the annual compensation process, the Committee reviews all elements of compensation for the NEOs and other ELG participants, including realized and unrealized long-term award values. The Committee does not adjust, either negatively or positively, current or future compensation opportunities on the basis of accrued or realized gains attributable to prior awards and prior service.
The Committee conducts an overall review annually to ensure that the program meets its intended goals. The Committees review for 2007 indicated that, as intended, variable and performance-based compensation constitutes the substantial majority of pay for senior executives. Values realized by executives above the CPG medians are substantially attributable to UTCs earnings and stock price performance in excess of initial and challenging projections and of market indices. As stated earlier, UTCs total shareowner return over the 1998-2007 decade was 388%, as compared with 105% for the Dow Jones Industrials and 78% for the S&P 500.
The Committee does not and has not permitted backdating or re-pricing of stock options or SARs. Grant dates are on or shortly after the date the Committee approves awards. Exercise price equals the closing price for UTC Common Stock on the grant date. UTCs regular cycle awards account for the great majority of total awards and are made on a consistent basis within the first week of each calendar year, coincident with the beginning of the three-year measurement period for performance-based awards. Recruitment, retention, and promotion needs occasionally result in out-of-cycle awards. The underlying event drives the timing of such awards, and they are not related in any way to the timing of disclosure of material non-public information.
Protecting UTCs Interests
The executive compensation program imposes certain requirements intended to protect UTCs interests:
Report of the Committee on Compensation and Executive Development
The Committee on Compensation and Executive Development establishes and oversees the design and functioning of UTCs executive compensation program. We have reviewed and discussed the foregoing Compensation Discussion and Analysis with the management of the Company and recommend to the Board of Directors that the Compensation Discussion and Analysis be included in UTCs Proxy Statement for the 2008 Annual Meeting.
Committee on Compensation and Executive Development
Summary Compensation Table
Grants of Plan-Based Awards
Outstanding Equity Awards at Fiscal Year-End
Outstanding Equity Awards at Fiscal Year-End (continued)
Option Exercises and Stock Vested
Retirement benefits are provided through defined benefit retirement plans that provide an annual benefit payment equal to 2% of earnings for each year of service up to a maximum of 20 years, plus 1% of earnings for each year thereafter, minus 1.5% of Social Security benefits for each year of service up to a maximum of 50%. Earnings recognized under this formula consist of base salary and bonus averaged over the highest five consecutive-year period. The formula does not recognize long-term incentive compensation. Normal retirement age is 65; unreduced retirement benefits are available at age 62 for retirements with at least ten years of service (only Mr. David qualifies for unreduced retirement benefits as of fiscal year-end). Early retirement benefits are available at age 55 with at least ten years of service, reduced by .2% for each month between the early retirement date and age 62. Vesting requires five years of service. There are no supplementary service recognition or benefit enhancement provisions. Benefits for Messrs. David, Darnis, and Hayes include amounts accrued under different formulas of Otis, Carrier, and Sundstrand predecessor plans that have since been merged into UTC retirement plans.
The UTC Employee Retirement Plan is a tax-qualified plan subject to Internal Revenue Code provisions that, as of fiscal year-end, limit recognized annual compensation to $225,000 and the annual retirement benefit to $180,000. This Plan does not offer a lump sum distribution option. The Pension Preservation Plan (the PPP) is an unfunded, non-tax qualified retirement plan utilizing the same benefit formula, compensation recognition, retirement eligibility and vesting provisions as the tax-qualified UTC Employee Retirement Plan. The PPP restores the benefits not provided under the qualified plan due to the Internal Revenue Code limitations previously described. Because amounts payable under the PPP are unfunded and unsecured, a lump sum distribution option is available. Unlike distributions from qualified plans, a PPP lump sum distribution is immediately fully taxable as ordinary income. To approximate actuarial equivalence to a pension annuity in light of the disparate tax treatment, the lump sum calculation uses a discount rate equal to the Lehman Brothers Municipal Bond Index averaged over five years.
Nonqualified Deferred Compensation
The UTC Deferred Compensation Plan offers the opportunity to defer up to 75% of annual base salary and up to 100% of annual bonus. For 2007, up to 50% of the ELG perquisite allowance may be deferred under the Plan. The minimum deferral period is five years. Distribution options are a lump sum payment or annual installment payments (2 to 15). If a participant terminates prior to retirement eligibility, all balances are paid as a lump sum the following April 1. Amounts deferred can be allocated to accounts that may be credited with one of the following hypothetical investment returns: (i) a fixed rate of interest equal to the average yield on a ten-year Treasury bond during the first ten months of the preceding calendar year, plus 1%; (ii) the return on the S&P 500 Index; or (iii) the return on UTC Common Stock with dividend reinvestment. Amounts may be re-allocated among investment accounts once per calendar year.
For 2007, non-employee directors were paid an annual retainer of $220,000 ($230,000 for committee chairs, $250,000 for Audit Committee members, $260,000 for the Audit Committee chair and the director designated to preside at
executive sessions of the non-management directors), which they may elect to receive in one of the following forms: (a) 60% in deferred stock units issued under the Directors Deferred Stock Unit Plan and 40% in cash; or (b) 100% in deferred stock units. Each deferred stock unit has a value equal to one share of UTC Common Stock. Following termination of a directors service, the value of the accumulated deferred stock units is paid in cash as a lump sum or in installments, at the election of the director. Each deferred stock unit balance is credited with additional deferred stock units in value equal to the dividend paid on the corresponding number of shares of UTC Common Stock. Non-employee directors also receive a fee of $5,000 for each special meeting they are required to attend in addition to the regularly scheduled Board and committee meetings. UTC maintains a charitable gift program for directors elected prior to 2003, funded by life insurance on the lives of the participating directors. Under this program, UTC will make charitable contributions totaling up to $1 million following the death of a director, allocated among up to four charities recommended by the director. Beneficiaries must be tax-exempt under Section 501(c)(3) of the Internal Revenue Code. Donations are expected to be deductible by UTC from taxable income for federal and other income tax purposes. Directors derive no financial benefit from the program since all insurance proceeds and tax deductions accrue solely to UTC.
Report of the Audit Committee.
The Audit Committee reviews and makes recommendations to the Board of Directors concerning the reliability and integrity of UTCs financial statements and the adequacy of its system of internal controls and processes to assure compliance with UTCs policies and procedures, Code of Ethics and applicable laws and regulations. The Committee annually nominates UTCs Independent Auditors for appointment by the shareowners, and evaluates the independence, qualifications and performance of UTCs internal and independent auditors. The Committee establishes procedures for and oversees receipt, retention, and treatment of complaints received by UTC regarding accounting, internal control or auditing matters; and the confidential, anonymous submission by UTC employees of concerns regarding questionable accounting or auditing matters.
The Committee has reviewed and discussed with management and UTCs Independent Auditors UTCs audited financial statements as of and for the year ended December 31, 2007, as well as the representations of management and the Independent Auditors opinion thereon regarding UTCs internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act. The Committee discussed with UTCs internal and Independent Auditors the overall scope and plans for their respective audits. The Committee met with the internal and Independent Auditors, with and without management present, to discuss the results of their examinations, the evaluation of UTCs internal controls, managements representations regarding internal control over financial reporting, and the overall quality of UTCs financial reporting. The Committee has discussed with UTCs Independent Auditors the matters required by Statement on Auditing Standards, No. 61 Communications with Audit Committees, as amended, and also the auditors independence from UTC and its management, including the written disclosures and letter from UTCs Independent Auditors required by Independence Standards Board, Standard No. 1, Independence Discussions with Audit Committees, as amended.
UTCs Independent Auditors represented to the Committee that UTCs audited financial statements were prepared in accordance with generally accepted accounting principles in the United States of America.
Based on the reviews and discussions referred to above, the Committee has recommended to the Board of Directors that the audited financial statements referred to above be included in UTCs Annual Report on Form 10-K for the year ended December 31, 2007 for filing with the SEC. The Committee nominates PricewaterhouseCoopers LLP for appointment by the shareowners as UTCs Independent Auditors for 2008.
PricewaterhouseCoopers LLP served as UTCs independent registered public accounting firm in 2007. The Audit Committee has nominated PricewaterhouseCoopers LLP to serve as Independent Auditors for UTC until the next Annual Meeting in 2009. Representatives of PricewaterhouseCoopers LLP will be present at the Annual Meeting, will have an opportunity to make any statements they desire, and will also be available to respond to appropriate questions from shareowners. UTC paid the following fees to PricewaterhouseCoopers LLP for 2007 and 2006:
Audit Fees in both years consisted of fees for the audit of UTCs consolidated annual financial statements and its internal control over financial reporting, the review of interim financial statements in UTCs financial statements filed on Form 10-Q and the performance of audits in accordance with statutory requirements.
Audit-Related Fees in both years consisted of fees for due diligence assistance related to mergers and acquisitions, employee benefit plan audits, advice regarding the application of generally accepted accounting principles to proposed transactions and special reports pursuant to agreed-upon procedures.
Tax Fees in 2007 consisted of approximately $4,367,000 for U.S. and non-U.S. tax compliance and related planning and assistance with tax refund claims, and approximately $5,054,000 for tax consulting and advisory services. In 2006, tax fees consisted of approximately $4,438,000 for U.S. and non-U.S. tax compliance and related planning and assistance with refund claims, and approximately $4,903,000 for tax consulting and advisory services.
All Other Fees represent fees in both years for accounting research software and other services.
The Audit Committee has adopted procedures requiring Committee review and approval in advance of all particular engagements for services provided by UTCs Independent Auditors. Consistent with applicable laws, the procedures permit limited amounts of services, other than audit, review or attest services, to be approved by one or more members of the Committee pursuant to authority delegated by the Committee, provided the Committee is informed of each particular service. All of the engagements and fees for 2007 were approved by the Committee. The Committee reviews with PricewaterhouseCoopers LLP whether the non-audit services to be provided are compatible with maintaining the auditors independence. The Board previously adopted the policy that fees paid to the Independent Auditors for non-audit services in any year shall not exceed the fees paid for audit and audit-related services during the year. Non-audit services are limited to fees for tax services, accounting assistance, audits in connection with acquisitions, and other services specifically related to accounting or audit matters such as audits of employee benefit plans.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREOWNERS VOTE FOR APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP.
PROPOSAL 3: AMENDMENT OF THE 2005 LONG-TERM INCENTIVE PLAN.
The Board of Directors has adopted, and is submitting to shareowners for approval, an amendment to the United Technologies Corporation 2005 Long-Term Incentive Plan (the Plan).
The Plan was approved by shareowners at the 2005 Annual Meeting. The Board believes that the Plan has served its purpose of enabling UTC to make equity and performance-based incentive awards that align executive compensation opportunities with shareowner value. The Board therefore wishes to continue the operation of the Plan by authorizing additional shares of UTC Common Stock for Plan awards and extending the term of the Plan. These amendments and several other amendments relating to the terms of awards made under the Plan are described below.
Since the adoption of the Plan, the number of shares subject to awards made under the Plan as a percentage of the number of fully diluted shares outstanding has averaged approximately 1% per year. If the proposed increase in shares available for delivery under the Plan is approved by shareowners, UTC expects that the annual dilution attributable to awards under the Plan will not differ materially from past practice.
For a discussion of the uses of awards under the Plan as components of UTCs executive compensation practices, please refer to the Compensation Discussion and Analysis above.
Description of the Amendment
The following is a description of the changes to the Plan that would be effected by the proposed amendment being submitted to shareowners for approval (the Amendment):
Under the terms of the Amendment, awards consisting of shares of Common Stock or units equal in value to a share of Common Stock (e.g., restricted stock, restricted stock units, performance share units) (a Full Share Award) will result in a reduction in the number of shares of Common Stock available for delivery under the Plan in an amount equal to 3.1 times the number of shares to which the award corresponds. Stock options and stock appreciation rights do not constitute Full Share Awards and will result in a reduction in the number of shares of Common Stock available for delivery under the Plan on a one-for-one basis. Neither dividends nor dividend equivalent payments are made with respect to stock option or stock appreciation rights. Shares surrendered to pay taxes count against the share reserve. If an award is subsequently forfeited or terminates, the shares of Common Stock to which the award corresponds will be reinstated as shares available for delivery pursuant to future awards under the Plan.
The Amendment also expands the clawback to provide that if within 12 months following any termination of a Plan participants employment, the participant becomes employed by, or otherwise renders services to, any person or business entity that engages in activities that compete with the UTC business unit that employed the participant, the participant will forfeit all awards then held and will be required to repay all income and gains from awards under the Plan realized within the 12 months prior to the termination of the participants employment. The Committee believes that these increased restrictions will deter participants from engaging in competitive activities, thereby providing valuable protection to UTC that is reasonable in relationship to the potential value to participants of awards to which they apply.
Description of the Material Terms of the Plan
A complete copy of the Plan, as amended, is set forth in Appendix B and incorporated by reference. The following is a summary of the material terms of the Plan in addition to those provisions described above, which are the subject of the Amendment.
Purpose of the Plan. The purpose of the Plan is to align shareowner and management interests through stock and performance-based awards linked to shareowner value and to give UTC a competitive advantage in attracting and retaining key employees and directors.
Administration of the Plan. The Plan is administered by the Boards Committee on Compensation and Executive Development which is composed exclusively of non-employee directors determined to be independent in accordance with NYSE listing standards. The Committee has full authority to administer the Plan, including, without limitation, the authority to determine who will receive awards, to determine the terms and conditions of awards, to interpret awards and Plan provisions, and to amend outstanding awards subject to such limitations as are imposed by the Plan, including in the event of a change-in-control. The Committee may delegate authority to grant, interpret and administer awards to officers of UTC, provided that it may not delegate authority with respect to awards granted to executives who are subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended.
The Committee has delegated to the Board of Directors Committee on Nominations and Governance the authority to grant, interpret and administer awards under the Plan to UTCs non-employee directors.
Eligibility and Participation. Directors, officers and employees of UTC, its subsidiaries and affiliates are eligible to participate in the Plan, as determined by the Committee or its delegate.
Individual Award Limits. No individual participant may be granted awards covering in excess of 1,000,000 stock options and stock appreciation rights or in excess of 500,000 restricted shares, restricted share units and other full share awards in any one calendar year.
Types of Awards that Can be Awarded Under the Plan. The Plan allows for the grant of the following types of awards.
Stock Options and Stock Appreciation Rights. A stock option entitles the holder to purchase a specified number of shares of Common Stock at a specified exercise price. Stock options, at the discretion of the Committee, may be non-qualified stock options or stock options that are intended to comply with the requirements of Section 422 of the Internal Revenue Code. A stock appreciation right entitles the holder to receive shares of Common Stock or cash equal in value to the difference between the fair market value of Common Stock on the exercise date and the exercise price of the stock appreciation right. The terms of stock options and stock appreciation rights may not exceed ten years and the exercise price may not be less than the fair market value of the Common Stock on the date of the grant. The vesting and exercisability of stock options and stock appreciation rights awards can be made subject to such terms and conditions as the Committee shall determine.
Restricted Stock, Restricted Stock Units and Performance Share Units. A restricted stock award is an award of shares of Common Stock subject to a restriction on transferability. The restriction on transferability will lapse following a stated period of time, upon attainment of specified performance targets or a combination thereof. A recipient of a restricted stock award will have all of the rights of a holder of Common Stock with respect to the underlying shares, including the right to vote the shares and receive dividends, but will not have the right to sell, assign, transfer, pledge or otherwise encumber the shares until the transferability restrictions lapse. A restricted stock unit is equal in value to one share of Common Stock and will vest following a specified period of continuous employment. A performance share unit has a value that corresponds to a share of Common Stock and is subject to vesting on the basis of the achievement of specified performance targets. Upon vesting, a performance share unit may be settled in either shares of Common Stock or cash, as determined by the Committee and specified in the award agreement. The Committee intends to continue its practice of granting at least 50% of the value of regular cycle long-term incentive awards to the most senior executives in the form of performance share units with vesting subject to three-year performance targets. The holders of restricted stock units and performance share units are not entitled to the rights of a holder of Common Stock.
Other Stock-Based Awards. The Plan also authorizes other types of awards valued by reference to Common Stock, including unrestricted stock awards and dividend equivalents as approved in the discretion of the Committee.
Adjustment Events. The number of shares reserved for delivery under the Plan and the terms of awards granted under the Plan are subject to adjustment in the following circumstances.
Stock Splits and Similar Events. In the event of a stock split, reverse stock split, share combination, recapitalization, sale of assets, stock dividend, extraordinary dividend or similar event affecting the value of the Common Stock or the number of shares outstanding, the total number of shares authorized for delivery under the Plan, the limitations on the various types of awards permitted by the Plan, the number of shares subject to outstanding awards, and the exercise price of outstanding stock options and stock appreciation rights will be adjusted as necessary and appropriate to reflect the change in the number or value of outstanding shares and to preserve the value of outstanding awards.
Corporate Transactions. In the event of a merger, consolidation, spin-off, reorganization, stock rights offering, liquidation, or other material event affecting the capital structure of UTC, the Committee in its discretion may make such substitutions or adjustments as it deems appropriate and equitable to (i) the aggregate number and kinds of shares reserved for delivery under the Plan, (ii) the limitations on the various types of awards permitted by the Plan,
(iii) the number and kind of shares subject to outstanding awards, and (iv) the exercise price of outstanding stock options and stock appreciation rights. Such adjustments may include, without limitation, the cancellation of outstanding awards in exchange for payments of cash, property, or a combination thereof having an aggregate value equal to the cancelled awards as determined by the Committee to be necessary or appropriate to protect the value of participants interests in their awards.
Change-in-Control. In the event of a Change-in-Control (as defined by the Plan), the Committee may, in its discretion, take any or all of the following actions: (i) provide that all outstanding stock options and stock appreciation rights will immediately vest and become exercisable, (ii) immediately lapse any restrictions applicable to any restricted stock or restricted stock unit award, (iii) provide that performance-based vesting targets applicable to performance share units and other awards will be deemed satisfied and that the awards will be considered to be earned and payable in full, and (iv) make such other adjustment, substitutions or settlements with respect to outstanding awards as the Committee deems appropriate to protect participants interests in the awards. In addition, if within 24 months following a change-in-control an award recipient is involuntarily terminated, resigns following a material and adverse change in compensation, responsibilities, functions or reporting relationship or resigns rather than relocate more than 50 miles from his or her job location, then, without further action by the Committee, such recipient will become vested in all outstanding awards as of the date of termination. Stock appreciation rights and stock options so vested may be exercised until the earlier of the third anniversary of the date of termination or the expiration of the term of the award.
Qualified Performance-Based Awards
The Plan provides that compensation from stock options, stock appreciation rights, performance share units and other performance-based awards will generally be structured to be exempt from the limitation on deductible compensation imposed by Section 162(m) of the Internal Revenue Code. The Committee will administer the Plan and the Plan will be interpreted consistent with the purpose of maintaining the exemption from the Section 162(m) deduction limitation, except that qualified performance targets will be waived in the event of death and may be waived in the event of a change of control. The Committee is responsible for certifying to the measurement of applicable performance targets. The Plan provides that performance-based compensation awards intended to be exempt from the Section 162(m) deduction limitation will be subject to vesting on the basis of one or more of the following performance targets: (i) diluted earnings per share; (ii) total shareowner return; (iii) working capital and gross inventory turnover; or (iv) revenue growth.
Federal Income Tax Consequences
The following discussion is intended only as a brief summary of the material U.S. Federal income tax rules that are generally relevant to Plan awards. The laws governing the tax aspects of awards are highly technical and such laws are subject to change.
Upon the exercise of a stock appreciation right, an award recipient will be subject to ordinary income tax, and wage and employment tax withholding equal to the excess of the fair market value of Common Stock on the exercise date over the fair market value of Common Stock on the date of grant. UTC will generally be entitled to a corresponding deduction equal to the amount of ordinary income that the recipient recognizes. Upon the sale of Common Stock acquired upon exercise of a stock appreciation right, the recipient will recognize long or short-term capital gain or loss, depending on whether the recipient held the stock for more than one year from the date of exercise. Upon the exercise of a non-qualified option, the excess of the fair market value of the shares acquired on the exercise of the option over the exercise price paid (the spread) will constitute compensation taxable to the recipient as ordinary income. UTC will generally be entitled to a corresponding deduction equal to the amount of ordinary income recognized by the recipient. With respect to incentive stock options (ISOs), a recipient who holds shares acquired upon exercise will not recognize taxable income. If the recipient holds the shares for at least one year, the recipient will recognize long-term capital gain or loss, as the case may be, measured by the difference between the stocks selling price and the exercise price. UTC will not receive a tax deduction with respect to the exercise of an ISO if the one year ISO holding period is satisfied. Award recipients do not recognize any taxable income and UTC is not entitled to a deduction upon the grant of a stock appreciation right, a non-qualified option or an ISO.
The recipient of a performance share unit, restricted stock, restricted stock unit, or other stock-based or performance-based award will not recognize taxable income at the time of grant as long as the award is subject to a substantial risk of forfeiture as a result of performance-based vesting targets, continued service requirements or other conditions that must be satisfied before payment or delivery of shares can occur. The recipient will generally recognize ordinary income and be subject to wage and employment tax withholding when the substantial risk of forfeiture expires or is removed unless the cash to be paid or shares to be delivered are deferred until a date subsequent to the vesting date. UTC will generally be entitled to a corresponding deduction equal to the amount of income the recipient recognizes.
Foreign Employees and Foreign Law Considerations
The Committee may grant awards to individuals who are foreign nationals and are located outside of the United States. With respect to such individuals, the Committee is authorized to amend the Plan, establish sub-plans or provide provisions to applicable award agreements for the purpose of complying with legal or regulatory provisions of countries outside the United States.
Amendment of the Plan
The Board of Directors may amend, alter or discontinue the Plan at any time, subject to the following qualifications: (i) no such amendment, alteration or discontinuance may materially impair the rights of a participant with respect to a previously-granted award without the participants consent, unless the amendment is required to comply with applicable law, stock exchange rules or accounting rules; and (ii) no amendment may be made without the approval of UTCs shareowners if such approval is required by applicable law or NYSE listing standards. Under NYSE listing standards, the number of shares of Common Stock available for delivery under the Plan (other than to reflect a reorganization, stock split, merger spinoff or similar transaction) may not be increased without the approval of shareowners.
New Plan Benefits
All awards to be made under the Plan, as it is proposed to be amended, are subject to the discretion of the Committee or its delegate, and accordingly are not determinable.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSED AMENDMENT TO THE 2005 LONG-TERM INCENTIVE PLAN.
Equity Compensation Plan Information.
The following table provides information as of December 31, 2007 concerning Common Stock issuable under equity compensation plans.
Share holdings of each shareowner proponent and, where applicable, names and addresses of additional proponents of the proposal will be supplied upon request.
Proposal 4: Shareowner Proposal Concerning Principles for Health Care Reform.
A representative of the AFL-CIO Reserve Fund, 815 Sixteenth Street, N.W., Washington, D.C. 20006 has advised that the Fund intends to introduce the following proposal at the Annual Meeting:
RESOLVED: Shareholders of United Technologies Corporation (the Company) urge the Board of Directors to adopt principles for health care reform based upon principles reported by the Institute of Medicine:
The Institute of Medicine, established by Congress as part of the National Academy of Sciences, issued five principles for reforming health insurance coverage in a report, Insuring Americas Health: Principles and Recommendations (2004). We believe principles for health care reform, such as those set forth by the Institute of Medicine, are essential if public confidence in our Companys commitment to health care coverage is to be maintained.
Access to affordable, comprehensive health care insurance is the most significant social policy issue in America according to polls by NBC News/The Wall Street Journal, the Kaiser Foundation and The New York Times/CBS News. In our opinion, health care reform also is a central issue in the presidential campaign of 2008.
Many national organizations have made health care reform a priority. In 2007, representing a stark departure from past practice, the American Cancer Society redirected its entire $15 million advertising budget to the consequences of inadequate health coverage in the United States (The New York Times, 8/31/07).
John Castellani, president of the Business Roundtable (representing 160 of the countrys largest companies), has stated that 52 percent of the Business Roundtables members say health costs represent their biggest economic challenge. The cost of health care has put a tremendous weight on the U.S. economy, according to Castellani, The current situation is not sustainable in a global, competitive workplace. (Business Week, July 3, 2007.)
The National Coalition on Health Care (whose members include some of the largest publicly-held companies, institutional investors and labor unions), also has created principles for health insurance reform. According to the National Coalition on Health Care, implementing its principles would save employers presently providing health insurance coverage an estimated $595-$848 billion in the first 10 years of implementation.
We believe that the 47 million Americans without health insurance results in higher costs, causing an adverse effect on shareholder value for our Company, as well as all other U.S. companies which provide health insurance to their employees. Annual surcharges as high as $1,160 for the uninsured are added to the total cost of each employees health insurance, according to Kenneth Thorpe, a leading health economist at Emory University. Moreover, we feel that increasing health care costs further reduces shareholder value when it leads companies to shift costs to employees, thereby reducing employee productivity, health and morale.
The Board of Directors Statement in Opposition
UTC acknowledges the importance of health care issues worldwide. However, the Company and the Board believe that health care reform is more appropriately a matter for legislative action with resulting reforms applicable to employers in general. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREOWNERS VOTE AGAINST THIS PROPOSAL.
Domestically, UTC provides a comprehensive benefits package offering employees health care choices. The Company works with insurers and health care providers to offer employees quality care at reasonable costs. The Company also supports wellness initiatives throughout its facilities ranging from on-site fitness centers to weight control and smoking cessation programs.
Proposal 5: Shareowner Proposal Concerning Global Set of Corporate Standards.
The Domestic and Foreign Missionary Society of the Episcopal Church, 815 Second Avenue, New York, NY 10017 has advised that they intend to introduce the following proposal at the Annual Meeting:
Whereas, United Technologies, as a global corporation, faces increasingly complex problems as the international social and cultural context within which United Technologies operates changes.
Companies are faced with ethical and legal challenges arising from diverse cultures and political and economic contexts. Today, management must address issues that include human rights, workers right to organize and bargain collectively, non-discrimination in the workplace, protection of the environment and sustainable community development. United Technologies itself does business in over 180 countries with human rights challenges including China, Colombia and Israel and the occupied Palestinian territories, for example.
We believe global companies must implement comprehensive codes of conduct, such as those found in Principles for Global Corporate Responsibility: Bench Marks for Measuring Business Performance, developed by an international group of religious investors. (April, 2003, www.bench-marks.org) Companies must formulate policies to reduce risk to reputation in the global marketplace.
In August 2003, the United Nations Sub-Commission on the Promotion and Protection of Human Rights took historic action by adopting Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights. (www1.umn.edu/humanrts/links/NormsApril2003.html)
We believe significant commercial advantages may accrue to our company by adopting a comprehensive human rights policy based on the UN Human Rights Norms serving to enhance corporate reputation, improve employee recruitment and retention, improve community and stakeholder relations and reduce risk of adverse publicity, consumer boycotts, divestment campaigns and lawsuits.
RESOLVED, the shareholders request the Board of Directors to review and amend, where applicable, United Technologies Code of Ethics to include human rights as a guide for its international and U.S. operations. We request a summary of this review by October 2008 and suggest it be posted on the companys website.
United Technologies current policy, the Code of Ethics, contains no references to existing international human rights codes, and does not address the broad range of human rights issues except for a corporate policy of nondiscrimination, and aspirational goals to maintain the health and safety of employees. We believe that our companys policies should reflect a more comprehensive understanding of human rights.
Therefore, we recommend the review include policies designed to protect human rightscivil, political, social, environmental, cultural and economicbased on internationally recognized human rights standards. We particularly urge attention to harassment or discrimination against women and other forms of violence in the workplace as well as the rights of minorities. We believe the review also should take note of the International Labor Organizations Core Labor Standards, Universal Declaration of Human Rights, the Fourth Geneva Convention, the International Covenant on Civil and Political Rights, the International Covenant on Economic, Cultural and Social Rights, and United Nations resolutions and reports of UN special rapporteurs on countries where United Technologies does business.
This review and report will assure shareholders that our companys policies and practices reflect or conform to human rights conventions and guidelines and international law. We ask that you support this resolution.
The Board of Directors Statement in Opposition
UTC is firmly and thoroughly committed to fair and equal treatment of all participants within its constituencies. However, the Company and the Board believe human rights advocacy in societies generally is the province of legislative bodies and non-governmental organizations. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREOWNERS VOTE AGAINST THIS PROPOSAL.
UTC requires standards of corporate and individual employee behavior through its Code of Ethics, first adopted in 1990 and updated in 2006. The Codes preamble states, Successful businesses improve the human condition. We maintain the highest ethical, environmental and safety standards everywhere, and we encourage and celebrate our employees active roles in their communities. This Code and extensive implementing information is available on UTCs website at http://www.utc.com/responsibility/ethics/code_of_ethics/htm.
The Code confirms respect for human rights through the affirmation of principles directly relevant to UTCs global operations. It affirms UTCs commitment to treat employees and stakeholders fairly, with dignity and respect and without distinction as to race, color, gender, language, religion, or national or social origin. UTC is committed to protecting legitimate privacy interests and providing safe and secure working conditions and competitive employee compensation and benefits. UTC encourages employee participation in the political and cultural life of the community.
UTC publishes annually its Corporate Responsibility Report (available at www.utc.com), which highlights performance against internal and external Key Performance Indicators such as governance, employee health and safety, employee education, and environmental and sustainability metrics. UTC believes its record is excellent, with regular inclusion as one of the 100 Most Sustainable Corporations in the World (World Economic Forum in Davos) and being named the Most Admired aerospace and defense company in the U.S. by Fortune magazine for the seventh consecutive year.
Proposal 6: Shareowner Proposal Concerning Pay For Superior Performance.
Rocco Calo, Secretary-Treasurer/Principal Officer, Teamsters Union Local No. 1150, Sikorsky Aircraft Helicopter Internationally, 150 Garfield Avenue, Stratford, CT 06615, has advised that he intends to introduce the following proposal at the Annual Meeting:
Resolved: That the shareholders of United Technologies Corporation (Company) request that the Board of Directors Executive Compensation Committee adopt a Pay for Superior Performance principle by establishing an executive compensation plan for senior executives (Plan) that does the following:
I feel it is imperative that executive compensation plans for senior executives be designed and implemented to promote long-term corporate value. The pay-for-performance concept has received considerable attention, yet all too often executive pay plans provide generous compensation for average or below average performance when measured against peer performance. I believe the failure to tie executive compensation to superior corporate performance has fueled the escalation of executive compensation and detracted from the goal of enhancing long-term corporate value.
A strong pay and performance nexus will be established when reasonable incentive compensation target pay levels are established; demanding performance goals related to strategically selected financial performance metrics are set in comparison to peer company performance; and incentive payments are awarded only when median peer performance is exceeded.
I believe the Companys Plan fails to promote the Pay for Superior Performance principle in several important ways. The Companys executive compensation plan reveals the following features that do not promote the Pay for Superior Performance principle:
I believe a plan designed to reward superior corporate performance relative to peer companies will focus senior executives on building sustainable long-term corporate value.
The Board of Directors Statement in Opposition
The Board agrees with the premise of this proposal that it is imperative that compensation plans for senior executives be designed and implemented to promote long-term corporate value. However, the Board believes that UTCs executive compensation system already meets this premise entirely and that changes to a proven program would be adverse to the Company and its shareowners. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREOWNERS VOTE AGAINST THIS PROPOSAL.
UTC believes total shareowner return (TSR) is the best measure of long-term corporate value. UTC has consistently had exemplary performance on this metric:
UTCs incremental shareowner value over these three periods relative to the S&P 500 Index has been $57 billion, $47.5 billion, and $24.6 billion, respectively.
Beyond the demonstrated shareowner value, the Board believes the Companys executive compensation program is already responsive to the points in this proposal. Base salaries and annual bonuses are targeted at the median of UTCs Compensation Peer Group, subject to individual adjustments. Although the target value of long-term incentive awards for the most senior executives exceeds the median, actual realized values are linked directly to shareowner value generation.
Performance metrics are summarized here and more fully described in the Compensation Discussion and Analysis section of this Proxy Statement:
The Board believes the S&P 500 Index is the appropriate relative performance index because it is well recognized and broad and because the Company competes for shareowner funds in this market generally.
In sum, UTC notes that its shareowner value creation under the current compensation program has consistently and significantly exceeded both peer companies and market indices. The Board believes the modifications proposed are more likely to detract from than enhance shareowner value.
Proposal 7: Shareowner Proposal Concerning Offsets for Foreign Military Sales.
The Sisters of Charity of Saint Elizabeth, P.O. Box 476, Convent Station, NJ 07961 and other proponents have advised that they intend to introduce the following proposal at the Annual Meeting:
Whereas in FY2006, United Technologies ranked 8th largest Department of Defense contractor with $4.6 billion in contracts. (Government Executive, 8-15-07)
RESOLVED: Shareholders request that, within six months of the annual meeting, the Board of Directors provide a comprehensive report, at reasonable cost and omitting proprietary and classified information, of United Technologies significant promises (including technology transfers), made to foreign governments or firms in connection with foreign military sales, intended to offset U.S. dollar cost of weapons purchased by foreign nations.
Offsets are agreements by U.S. weapons manufacturers and the U.S. government to direct some benefitsusually jobs or technologyback to the purchasing country as a condition of sale. The value of offsets sometimes exceeds
the weapons cost. Direct offsets transfer purchasing dollars and/or work and military technology, often through licensing or joint production, to the recipient country to produce a U.S. weapons system, components or subcomponents. Indirect offsets may involve investments in the purchasing country, counter-trade agreements to market foreign goods or transfers of commercial technology.
U.S. taxpayers finance offsets by paying for research and development of weapons and providing grants, loans and loan guarantees for sales. Offsets also lead to loss of well-paying U.S. jobs.
Between 1993 and 2005 U.S. companies reported entering into 538 offset agreements with 41 countries. Export sales totaled $79.5 billion. Related offset agreements were valued at $56.6 billion or 71.2% of export contract value. Aerospace defense systems sales (aircraft, engines and missiles) were valued at $66.8 billion and 84% of total export contracts. In 2005, offset transactions were valued at $4.7 billion, with defense 38.2% of the total. For every dollar a U.S. company received from an arms sale associated with offsets, it returned, on average, 54.5 cents worth of offset obligations to the purchasing country. (Offsets in Defense Trade, January 2007, Commerce Department)
The faith-based proponents submit this resolution because arms exports do not create jobs. That 2007 Commerce Department study also states subcontracting, purchasing, co-production and licensing offset transactions are most likely to shift production and sales from U.S. suppliers to overseas firms. Other categories e.g. technology transfer, training, overseas investment and marketing can shift sales from U.S. suppliers but it is more difficult to calculate the impact.
Our arms industry closely guards information on offsets, claiming proprietary privilege. However, purchasing countries often disclose that information for political purposes, e.g., to convince citizens of tangible benefits from spending millions or billions on arms.
The proponents believe that insofar as U.S. weapons manufacturers engage in foreign policy by negotiating private offset agreements with foreign governments and export domestic jobs while claiming that foreign military sales create jobs, they forfeit proprietary claims to this information.
Sound public policy demands transparency and public debate on these matters. Weapons proliferation and export of jobs and technology through offsets raise profound moral and ethical, as well as fiscal, questions for shareholders to address.
We urge support for our reasonable disclosure request.
The Board of Directors Statement in Opposition
UTCs sales internationally of technology-intensive products and associated offset requirements are extensively regulated by the U.S. Government under its export control legislation.(1)
A January 2007 Department of Commerce report to Congress confirms that more than 90 percent of defense export transactions require some form of offset commitment.(2) The report also concludes that during the period 2001-2004, defense export sales had a net positive impact on employment in the U.S. including the impact of direct offsets on U.S. aerospace manufacturing jobs.
Because UTCs sales internationally of technology-intensive products and associated offsets are extensively regulated and UTC believes disclosure could increase future offset requirements, THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREOWNERS VOTE AGAINST THIS PROPOSAL.
ADDITIONAL MEETING INFORMATION.
How many shares can vote? As of the record date, 980,176,716 shares of UTC Common Stock were issued and outstanding. Each share of UTC Common Stock outstanding on the record date is entitled to one vote. A quorum requires the presence at the Annual Meeting, in person or by proxy, of the holders of shares representing a majority of the outstanding shares.
How many votes are needed for the election of directors at the meeting? Under Section 2.2 of UTCs Bylaws, each director is elected by a majority of votes cast with respect to that director, provided that if the number of nominees exceeds the number of directors to be elected, the nominees receiving the greatest number of votes shall be elected as directors. Because Delaware law provides that an incumbent director continues in office until his or her successor has been elected and qualified (or until the directors earlier removal or resignation) notwithstanding that a majority of the votes cast were not voted for his or her re-election, UTC has adopted a Corporate Governance Guideline requiring that any nominee who is an incumbent director and who receives in an uncontested election fewer votes for than withheld from his or her election must promptly tender his or her resignation to the Chairman of the Committee on Nominations and Governance. The Committee on Nominations and Governance shall then consider the matter and, taking into consideration all factors it deems relevant, shall recommend to the Board whether the resignation should be accepted and, if the Board accepts the resignation, whether the vacancy so created should be filled or the size of the Board should be reduced. The Board will act on the Committees recommendation within 90 days after the certification of the election results. The Boards decision will be disclosed in an 8-K Report filed with the SEC. The Corporate Governance Guidelines are available on UTCs website at http://investors.utc.com/downloads/principles.pdf.
How many votes are needed for the adoption of other matters at the meeting? Matters other than the election of directors and the proposed amendment of the LTIP will be approved if they receive the affirmative vote of a majority of the votes constituting the quorum. In accordance with the NYSE listing requirements, the Amendment to the LTIP will be approved if it receives votes in favor representing a majority of the votes cast on the matter (provided the total votes cast on the matter represent over 50% of the shares outstanding). If a shareowner abstains from voting on any of these other matters, his or her shares will be treated as present for purposes of determining the existence of a quorum but will not be counted as a vote for or against the matter. Shares that are the subject of broker non-votes (as described in response to the question How will the proxy holders vote my shares? above) will also be treated as present for purposes of determining the quorum, but will not be counted as a vote for or against the matter.
Is cumulative voting for directors permitted? Yes. When voting for the election of directors, each owner of UTC Common Stock is entitled to a number of votes equal to the number of shares of UTC Common Stock owned multiplied by the number of directors to be elected. This number of votes may be cast for a single nominee or distributed as votes for any two or more nominees, in the discretion of the shareowner. Cumulative voting rights can be exercised only by submission of a written proxy card or voting instructions by mail. If no instruction is given the votes cast will be distributed by the proxy holders equally among the Boards nominees.
Who will count the vote? Will votes be confidential? Representatives of Computershare will receive and tabulate proxies, act as independent Inspectors of Election, supervise the voting and decide the validity of proxies. Computershare has been instructed that the vote of each shareowner must be kept confidential and must not be disclosed (except in the event of legal proceedings or, in the event of a contested proxy solicitation, to permit the solicitation of the votes of undecided shareowners).
Can a proxy be revoked? Yes. You may revoke your proxy before it is voted by sending written notice to the Corporate Secretary identifying the proxy being revoked; by following the prompts provided through the telephone and Internet voting facilities for revoking a proxy previously submitted by telephone or via the Internet; by submitting a new proxy card with a later date; or by voting in person at the meeting.
How will the proxy holders vote on any other business conducted at the meeting? Although we do not know of any business to be conducted at the meeting other than the matters described in this Proxy Statement, duly signed
proxy cards and voting instructions submitted by telephone or via the Internet authorize the voting of your shares (other than shares held in the UTC Employee Savings Plan) by the proxy holders in accordance with their judgment on any other matters that may arise.
When are shareowner proposals for the 2009 Annual Meeting due? A shareowner who wishes to have a proposal included in UTCs Proxy Statement for the 2009 Annual Meeting must submit the proposal in writing to the Corporate Secretary for receipt by October 24, 2008, in order to be considered for inclusion. Under UTCs Bylaws, a shareowner who wishes to introduce a proposal to be voted on at UTCs 2009 Annual Meeting that is not included in the Proxy Statement for the meeting must send advance written notice to the Corporate Secretary for receipt no earlier than December 10, 2008 and no later than January 9, 2009 and comply with the procedures set forth in Section 1.10 of UTCs Bylaws.
How are proxies solicited and how much is this solicitation expected to cost? In addition to the distribution of this Proxy Statement, proxies may be solicited on behalf of the Board of Directors by employees of UTC by mail, email, in person and by telephone. These employees will not receive any additional compensation for these activities. UTC will bear the cost of soliciting proxies and reimburse brokers and other nominees for reasonable out-of-pocket expenses for forwarding proxy materials to beneficial shareowners. Georgeson Inc. has been retained by UTC to assist in the distribution of proxy materials and the solicitation of proxies for a fee estimated at $16,000, plus out-of-pocket expenses.
How can shareowners obtain electronic access to the proxy materials, instead of receiving mailed copies? Holders of shares registered in their name on the records of Computershare may contact Computershare at www.computershare.com/us/ecomms to sign up to receive electronic access to the materials rather than receiving mailed copies. Shareowners electing electronic access will receive email notification when the Annual Report and Proxy Statement are available, with electronic links to access the documents (in PDF and HTML formats) on a designated website and instructions on how to vote shares via the Internet. Enrollment for electronic access will be effective for a future annual meeting if submitted two weeks prior to the record date for that meeting, and will remain in effect for subsequent years, unless cancelled no later than two weeks prior to the record date for any subsequent annual meeting. Beneficial shareowners also may be able to obtain electronic access to proxy materials by contacting the broker, bank or nominee, or by contacting Broadridge Financial Solutions at http://enroll.icsdelivery.com/utc.
How can shareowners reduce the number of copies of proxy materials sent to a household? Eligible beneficial shareowners who share a single address may have received a notification that only one copy of the Annual Report and Proxy Statement will be sent to that address unless the broker, bank or nominee that provided the notification received contrary instructions from any beneficial shareowner at that address. This practice, known as householding, is designed to reduce printing and mailing costs. However, if a beneficial shareowner at such an address wishes to receive a separate Annual Report or Proxy Statement this year or in the future, the shareowner may contact the Corporate Secretary at 860-728-7870 or at UTC, One Financial Plaza, Hartford, CT 06103. Eligible registered shareowners receiving multiple copies of these documents can request householding by contacting UTC in the same manner. Persons holding shares through a broker, bank, or nominee can request householding by contacting that entity.
Corporate Governance Information and Code of Ethics.
UTCs Corporate Governance Guidelines, the charter for each Board Committee and UTCs Code of Ethics are available on UTCs website: http://investors.utc.com/governance.cfm and printed copies will be provided to any shareowner upon request addressed to the Corporate Secretary. The Code of Ethics applies to all directors and employees, including the principal executive, financial and accounting officers. Shareowners and other interested persons may send communications to the Board, the Chairman, the Presiding Director or one or more non-management directors by using the contact information provided on UTCs website under the headings Governance, Contact UTCs Board. Shareowners and interested persons also may send communications by letter
addressed to the Corporate Secretary at UTC, One Financial Plaza, Hartford, CT 06103 or by contacting the Business Practices Office at 860-728-6485. These communications will be received and reviewed by UTCs Business Practices Office. The receipt of concerns about UTCs accounting, internal controls, auditing matters or business practices will be reported to the Audit Committee. The receipt of other concerns will be reported to the appropriate Committee(s) of the Board. UTC employees also can raise questions or concerns confidentially or anonymously using UTCs Ombudsman/DIALOG program.
Transactions with Related Persons.
UTC has adopted a written policy for the review of transactions with related persons. The policy requires review, approval or ratification of transactions exceeding $120,000 in which UTC is a participant and in which a UTC director, executive officer, a significant shareowner or an immediate family member of any of the foregoing persons has a direct or indirect material interest. These transactions must be reported for review by the Corporate Secretary, the Vice President, Business Practices and the Boards Committee on Nominations and Governance. Following review by these officers, the Committee determines whether these transactions are in, or not inconsistent with, the best interests of UTC and its shareowners, taking into consideration whether they are on terms no less favorable to UTC than those available with other parties and the related persons interest in the transaction. UTCs policy permits employment of related persons possessing qualifications consistent with UTCs requirements for non-related persons in similar circumstances, provided the employment is approved by the Senior Vice President, Human Resources and Organization and the Vice President, Business Practices.
A brother of William L. Bucknall, Jr., who served as Senior Vice President, Human Resources and Organization until his recent retirement, is employed by Sikorsky as Manager, Human Resources. Mr. Bucknalls brother receives an annual salary and bonus of less than $150,000, and compensation and benefits consistent with those provided to other employees with equivalent qualifications, experience and responsibilities at Sikorsky. This employment relationship was reviewed and ratified in accordance with UTCs policy for review of transactions with related persons.
Section 16(a) Beneficial Ownership Reporting Compliance.
UTC believes, based upon a review of the forms filed and written confirmation provided by its officers and directors, that during 2007 all of its officers and directors who are subject to Section 16(a) of the Securities Exchange Act of 1934 filed on a timely basis the reports required thereby.
Kathleen M. Hopko
Vice President, Secretary
and Associate General Counsel
INDEPENDENCE OF DIRECTORS
The Board has adopted these standards to assist in making determinations of director independence, and may revise them from time to time as it deems appropriate, subject to applicable stock exchange listing requirements. For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationship with UTC. The Board will consider all relevant facts and circumstances in making an independence determination, considering the issue not only from the standpoint of the director, but also from that of persons or organizations with which the director has an affiliation. In addition, a director is not independent if:
Director affiliations that do not conflict with these standards or exceed these thresholds will not be considered to impair a Directors independence. These standards will be applied in accordance with any transition provisions under the applicable stock exchange listing rules.
For purposes of this determination of director independence, the term immediate family member shall include a persons spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares such persons home. The term executive officer has the same meaning as specified for the term officer in Rule 16a-1(f) under the Securities Exchange Act of 1934.
As required by the Charter of the Audit Committee, Audit Committee members must also satisfy the independence requirements of Section 10A(m)(3) of the Securities Exchange Act of 1934.
PROPOSED AMENDMENT TO THE UTC 2005 LONG-TERM INCENTIVE PLAN
UNITED TECHNOLOGIES CORPORATION
2005 LONG-TERM INCENTIVE PLAN
Amended and restated as of April 9, 2008
SECTION 1. Purpose
The purpose of this Plan is to give the Corporation a competitive advantage in attracting, retaining and motivating officers, employees and directors through a long-term incentive plan providing stock and performance-based awards linked to shareowner value.
SECTION 2. Definitions
Certain terms used herein have definitions provided when they are first used. In addition, for purposes of this Plan, the following terms are defined as set forth below:
SECTION 3. Administration
SECTION 4. Common Stock Subject to Plan
SECTION 5. Options and Stock Appreciation Rights
Notwithstanding the foregoing, the Committee shall have the power, in its discretion, to apply different rules concerning the consequences of a Termination of Employment as set forth in the applicable Award Agreement.
SECTION 6. Restricted Stock
SECTION 7. Performance Share Units
SECTION 8. Restricted Stock Units
Nature of Award. A Restricted Stock Unit is equal in value to one Share of Common Stock and subject to vesting on the basis of a period of continuous employment with the Corporation or an Affiliate or other criteria as specified in the Award Agreement that constitute a substantial risk of forfeiture for purposes of Section 409A of the Code. Upon vesting, Restricted Stock Units will be settled by delivery of Shares to the Participant equal to the number of vested Restricted Stock Units. All Restricted Stock Units shall be settled no later than 2 1/2 months after the end of the year in which the Restricted Stock Units vest.
SECTION 9. Other Stock-Based Awards
Other Awards that are valued in whole or in part by reference to, or are otherwise based upon, Common Stock, including (without limitation) unrestricted stock, dividend equivalents, and convertible debentures, may be granted under the Plan.
SECTION 10. Future Events
SECTION 11. Qualified Performance-Based Awards
SECTION 12. Term, Amendment and Termination
SECTION 13. General Provisions
1. Election of Directors