The Advisors' Blog

Last month, the WSJ and several other outlets reported that Boeing would overhaul its employee & executive compensation program in order to incentivize a commitment to safety. The change comes after years of speculation about whether the company’s emphasis on financial returns would affect its products. I was very interested to see how these changes would be described in Boeing’s proxy statement, which is now on file for the company’s May 17th AGM (the company shifted its meeting back by about a month compared to last year’s meeting date).

In the CD&A, after describing the 2023 program and payouts, the company includes a section on “Early 2024 Compensation Decisions” – which first describes changes to the annual incentive program:

Changes to our 2024 Annual Incentive Plan

In January 2024, following the Alaska Airlines Flight 1282 accident and our assessment of performance against our operational product safety metrics of stability and quality during 2023, we initiated a comprehensive review of our annual incentive plan design to determine if changes were warranted. In this effort, we were informed by feedback from shareholders. Following this review, we made the following changes to our annual incentive plan for 2024:

• Weightings of financial and operational performance for Commercial Airplanes. In 2023, the Company Performance Scores for all three business units were weighted 75% towards financial performance and 25% towards operational performance. In 2024, the score for our commercial airplanes business will be weighted 60% towards operational performance, and 40% towards financial performance.

• Operational performance metrics. In recognition of the progress towards safety and quality that must be made across our enterprise, our operational performance metrics will be focused entirely on quality and safety goals. For Commercial Airplanes, these metrics will include reduction in rework and traveled work, completion of 787 join verification rework, delivery of 737 MAX inventory built prior to 2023 and reduction in employee injury rates.

• Financial performance metrics. In 2023, the financial performance component of our design was weighted 67% towards total Company performance and 33% towards business unit performance. In 2024, total Company and business unit performance will be equally weighted, in order to drive greater accountability for financial outcomes at the business unit level. Free cash flow will be the sole metric measured at the total Company level. At the business unit level, performance in revenue and operating earnings will contribute to incentive payouts, except for our defense business, where operating earnings will be the sole financial metric.

The company then discusses how safety metrics are incorporated into the long-term incentive program:

Changes to our 2024-2026 Long-Term Incentive Program

In early 2024, the Compensation Committee approved a long-term incentive award structure similar to that first implemented in 2023, comprised 45% of time-vested RSUs and 55% of PRSUs that will pay out between 0% and 200% of the target number of units granted based on the achievement of free cash flow goals over the 2024-2026 performance period. New for 2024, our PRSUs incorporate a product safety downward modifier, under which the NEOs’ calculated payout following the end of the three-year performance period may be reduced by 25% or down to 0% if two product safety operational goals are not timely completed. These two goals require (1) the design and deployment of an employee culture survey aimed at assessing how deeply and effectively our Safety Management System is inculcated in our workforce, and (2) the development and implementation of operational control limits for several programs (including the 737 program) that include measures for determining when a safety risk assessment is required before a product can move past a specified point in our production system. Unless these goals are both completed by or before year-end 2024, the 2024-2026 PRSU payout will be subject to either 25% reduction (if goals are completed in 2025) or reduction to 0% (if goals are completed after 2025). Progress towards completion of these two goals will be overseen by the Aerospace Safety Committee and subject to final certification by the Compensation Committee.

In accordance with its normal process, the Compensation Committee also set long-term incentive targets for each executive officer. However, after approving the long-term incentive targets for our senior executives, the Board and the Compensation Committee made the decision to reduce each executive’s long-term incentive award by the percentage decline in the Company’s stock price between January 5, 2024 (the day of the Alaska Airlines Flight 1282 accident) and the grant date. This decision was implemented to hold our leadership team accountable for the decline in our stock price following the accident, and resulted in an approximately 22% reduction in long-term incentive grant values as compared to target values for our senior leadership team. The impact of this decision process on our CEO’s 2024 long-term incentive award, and a comparison against his 2023 award, is shown below.

The graphic shows that in 2023, the CEO’s award was $21.25 million. The 2024 award target had been set at $17 million, which was reduced by 22%, down to $13.25 million – a 38% reduction compared to the 2023 award.

There will no doubt be a lot of attention on the company’s say-on-pay outcome and other AGM results. If say-on-pay garners high support, these program changes and the related disclosure could be a good playbook for other companies dealing with product & PR challenges.

– Liz Dunshee